“COMPARATIVE STUDY BETWEEN MUTUAL FUNDS OFFER BY VARIOUS

COMPANIES IN INDIAN MARKET”

TABLE OF CONTENTS

Chapter - 1 Introduction…………………………….………….……………………6

Chapter – 2 Objective and Scope of Study

2.1 Objective…………………………………….………..…………………….8

2.2 Scope of the Study ……………………………….……..………………….8

Chapter – 3 Limitations………………..………………..………….………………....9

Chapter - 4 Theoretical Perspectives

4.1 Industry Profile……………………………………………...…..….……...10

4.2 Concept and Role of Mutual Fund………………………………..….…….12

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4.3 Contribution of Various Players in Mutual Fund Market in India …….…..15

4.4 Organization and Management of Mutual Funds………….…..…….……..19

4.5 Investor’s profile…………………………………………..……………….25

4.6 Types of Mutual Funds………………………….………….………………30

4.7 Valuation of Mutual funds …………………………..…….……………….41

4.8 Mutual Fund Scheme Types………………………………..………………42

4.9 Different Modes of receiving the income earned from Mutual Fund

Investments…………………………………………..……..……………….44

4.10 Advantages of Investing through Mutual Funds……………………..……46

4.11 Evolution and Growth of Mutual Funds…………………………...………50

4.12 Recent Trends in Mutual Fund Industry……………………...………..…..55

4.13 Risk Factors of Mutual Fund……..……………………………………..…60

Chapter – 5 Methodology and Procedure of Work………………………………..64

Chapter – 6 Analysis of Data……………………………….…………...…………..67

Chapter – 7 Conclusions and Recommendation………………….……..………....91

Chapter – 8 Summary………..……………………………………………..……….93

ANNEXURE I - PROJECT PROPOSAL…………………………………………….94

ANNEXURE II - REFERENCES……………………………………………….….....99

ANNEXURE III - LIST OF CHARTS, FIGURES, DIAGRAMS & TABLES..….100

CHAPTER -1

INTRODUCTION

There are a lot of investment avenues available today in the financial market for an investor

with an investible surplus. He can invest in Bank Deposits, Corporate Debentures, and

Bonds where there is low risk but low return. He may invest in Stock of companies where

the risk is high and the returns are also proportionately high. The recent trends in the Stock

Market have shown that an average retail investor always lost with periodic bearish tends.

People began opting for portfolio managers with expertise in stock markets who would

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invest on their behalf. Thus we had wealth management services provided by many

institutions. However they proved too costly for a small investor. These investors have

found a good shelter with the mutual funds.

Mutual fund industry has seen a lot of changes in past few years with multinational

companies coming into the country, bringing in their professional expertise in managing

funds worldwide. In the past few months there has been a consolidation phase going on in

the mutual fund industry in India. Now investors have a wide range of Schemes to choose

from depending on their individual profiles.

Today an investor is interested in tracking the value of his investments, whether he

invests directly in the market or indirectly through Mutual Funds. This dynamic change

has taken place because of a number of reasons. With globalization and the growing

competition in the investments opportunity available he would have to make guided and

rational decisions on whether he gets an acceptable return on his investments in the funds

selected by him, or if he needs to switch to another fund.

In order to achieve such an end the investor has to understand the basis of appropriate

preference measurement for the fund, and acquire the basic knowledge of the different

measures of evaluating the performance of the fund. Only then would he be in a position

to judge correctly whether his fund is performing well or not, and make the right

decision.

The project’s idea is to project Mutual Fund as a better avenue for investment on a

long-term or short-term basis. Mutual Fund is a productive package for a lay-investor

with limited finances, this project creates an awareness that the Mutual Fund is a

worthy investment practice. Mutual Fund is a globally proven instrument. Mutual

Funds are ”Unit Trust” as it is called in some parts of the world has a long and

successful history, of late Mutual Funds have become a hot favorite of millions of

people all over the world.

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The driving force of Mutual Funds is the ‘safety of the principal’ guaranteed, plus the

added advantage of capital appreciation together with the income earned in the form of

interest or dividend. The various schemes of Mutual Funds provide the investor with a

wide range of investment options according to his risk bearing capacities and interest

besides; they also give handy return to the investor. Mutual Funds offers an investor to

invest even a small amount of money, each Mutual Fund has a defined investment

objective and strategy. Mutual Funds schemes are managed by respective asset

managed companies sponsored by financial institutions, banks, private companies or

international firms. A Mutual Fund is the ideal investment vehicle for today’s complex

and modern financial scenario.

The study is basically made to analyze the various open-ended equity schemes of

different Asset Management Companies to highlight the diversity of investment that

Mutual Fund offer. Thus, through the study one would understand how a common man

could fruitfully convert a pittance into great penny by wisely investing into the right

scheme according to his risk taking abilities.

CHAPTER-2

OBJECTIVE AND SCOPE OF STUDY

2.1 OBJECTIVE

The study has following objectives:

To project Mutual Fund as the ‘productive avenue’ for investing activities.

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To show the wide range of investment options available in Mutual Funds by

explaining its various schemes.

To compare the schemes based on Sharpe’s ratio, Treynor’s ratio, Co-

efficient, Returns and show which scheme is best for the investor based on his

risk profile.

To help an investor make a right choice of investment, while considering the

inherent risk factors.

To understand the recent trends in Mutual Funds world.

2.2 SCOPE OF THE STUDY

The study here has been limited to analyze open-ended equity Growth schemes of

different Asset Management Companies namely Kotak Mahindra Mutual Fund,

Reliance Mutual Fund, HDFC Mutual Fund, Franklin Templeton Mutual Fund,

HSBC Mutual Funds each scheme is analysed according to its performance against the

other, based on factors like Sharpe’s Ratio, Treynor’s Ratio, (Beta) Co-efficient,

Returns.

CHAPTER – 3

LIMITATIONS

Any study which is undertaken has some limitations. This study also has following

limitations:

The study is limited only to the analysis of different schemes and its suitability

to different investors according to their risk-taking ability.

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The study is based on secondary data available from monthly fact sheets,

websites and other books, as primary data was not accessible.

The study is limited by the detailed study of various schemes of Five Asset

Management Company.

CHAPTER - 4

THEORETICAL PERSPECTIVES

4.1 INDUSTRY PROFILE

About Mutual Fund Industry

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Mutual Funds are financial intermediaries which pool the savings of numerous

individuals and invest the money, thus related in a diversified portfolio of securities,

including equity, bonds debentures and other money market instruments, thus spreading

and reducing risk. The objective of mutual fund is to maximize the return to the investor

who participates in equity indirectly through mutual funds.

Even though the mutual fund industry grown in asset value from Rs.7000 Crores to

2,00,000/- Crores today, this is just the tip of the iceberg. According to most Fund

Managers, the real boom is yet to come.

The sum of Rs.2,00,000/- Crores represents just 3% - 4% of the total market

capitalization of 25,00,000 Crore. This compares poorly with the US, where the mutual

funds have nearly $ 6.8 billion of market capitalization of roughly Rs.70000 Crore, barely

3% - 4% of total market capitalization.

This is not expected, because mutual fund history in India, which dates back to 1964,

when the first open-ended mutual fund scheme Unit-64 was launched by Unit Trust of

India, is still dominated by it. The focus initially was income earning securities, with only

20 % of the Corpus going into equity. The early 80’s saw other schemes like the growing

income, fixed income, and monthly income being introduced by the UTI. But it was only

in 1986 that the first pure Growth equity scheme Master share was launched.

1989-90 was another landmark year in the history of mutual funds. For the fist time, the

monopoly of UTI over the industry was broken. The government allowed public sector

banks and insurance companies to enter this sector to bring in some competition.

But it was only in 1993, when the private sector was given the green signal to float

mutual funds, that excitement and competition came. Not only did the Government

allowed Indian companies to float mutual funds, it even allowed foreign funds to set in

shop in India and float funds. Thus, in one stroke, this sector was truly privatized.

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Today there are about 12-14 private players in the market including foreign funds such as

Morgan Stanley, besides the nine public sector players and UTI. Together, these funds

have mobilized around Rs.6500 Crore from the market. The collections could have been

better, had not the public sector funds been busy complying with the SEBI guidelines

pertaining to the formation of asset management companies etc.

But the best is yet to come. A number of companies have plans to float mutual funds at

various stages of implementation. Some of the major names which are likely to come to

the market are Tata Sons in collaboration with Kleinwort Benson, ITC Classic with

Thread needle UR, Oppenheimer of US, plus a host of others. And according to

conservative guesstimates, mutual funds are set to collect over Rs.10000 Crore from the

market this year.

The reason for such confidence is that with SEBI firm about the small investor taking the

mutual fund route to investments in the stock market, and the regulatory changes making

it much more difficult to get allotments in primary markets; small investors will not be

left with many opportunities.

4.2 Concept and role of Mutual Fund

WHAT IS MUTUAL FUND

SEBI Mutual Fund Regulation act, 1996, defines a Mutual Fund as “a fund

established in the form of a trust by a sponsor to raise money by the Trustees through

the sale of units to the public under one or more schemes for investing in securities in

accordance with these regulations”.

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A Mutual Fund is common pool of money into which Investor place their contributions

that are to be invested in accordance with a stated objective. The ownership of the Fund

is thus joint or “mutual”; the fund belongings to all investors.

A single investor’s ownership of the fund is in the same proportion as the amount of the

contribution made by him or her bears to the total amount of the fund.

Mutual Fund Operation Flow Chart

(Figure-1)

A Mutual fund uses the money collected from investors to buy those assets, which are

specifically permitted by its stated investment objective. Thus, an Equity Fund would buy

mainly Equity assets-ordinary shares, preference shares, warrants etc. A bond fund would

mainly buy debt instruments such as debentures, bonds or government securities. It is

these assets, which are owned by the investors in the same proportions as there

contribution bears to the total contribution of all investors put together.

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When an investor subscribes to a mutual fund, he or she buys a part of these assets or the

pool of funds that are outstanding at that time. It’s no different from buying “shares” of a

joint stock company, in which case the purchase makes the investor a part owner of the

company and its assets. In fact, in the USA, a Mutual fund is constituted as an investment

company and an investor “buys into the fund”, meaning he buys the shares of the fund. In

India, a mutual fund is constituted as a Trust and the investor subscribes to the “units”

issued by the fund, which is where the term unit Trust comes from.

IMPORTANT CHARACTERISTICS OF THE MUTUAL FUND

1. A mutual fund actually belongs to the investors who have pooled their funds.

The ownership of the mutual fund is in the hand of the investor

2. A mutual fund is managed by investment professional and other service

providers who earn a fee for their services from the fund

3. The pool of funds is invested in a portfolio of marketable investments. The

value of the portfolio is updated every day.

4. The investor’s share in the fund is denominated by “UNIT”. The value of the

unit changes with changes in the portfolio value every day the value of the

unit of investment is called as the Net Assets Value or NAV.

5. The investment portfolio of the fund is created according to the stated

investment objectives of the fund.

Every Mutual Fund is managed by a fund manager, who using his investment

management skills and necessary research works ensures much better return than what an

investor can manage on his own. The capital appreciation and other incomes earned from

these investments are passed on to the investors (also known as unit holders) in

proportion of the number of units they own.

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(Figure-2)

When an investor subscribes for the units of a mutual fund, he becomes part owner of the

assets of the fund in the same proportion as his contribution amount put up with the

corpus (the total amount of the fund). Mutual Fund investor is also known as a mutual

fund shareholder or a unit holder.

Any change in the value of the investments made into capital market instruments (such as

shares, debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is

defined as the market value of the Mutual Fund scheme's assets net of its liabilities. NAV

of a scheme is calculated by dividing the market value of scheme's assets by the total

number of units issued to the investors.

4.3 CONTRIBUTION OF VARIOUS PLAYERS IN MUTUAL FUND

MARKET IN INDIA

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Currently the total funds under mutual fund management in India are a little over

Rs.3, 26,388 crore. Out of this UTI accounts for nearly 70 percent while the private funds

account for around 22 percent. The balance 8 percent is managed by mutual funds floated

by public sector banks and financial institutions.

(Chart-1)

List of Members :

A) Bank Sponsored

    1. Joint Ventures - Predominantly Indian

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        a.   SBI Funds Management Private Ltd.

    2. Others

        a.   BOB Asset Management Co. Ltd.   

   b.   Canbank Investment Management Services Ltd.

        c.   UTI Asset Management Co. Private Ltd.

 B) Institutions

         a.   Jeevan Bima Sahayog Asset Management Co. Ltd.

C) Private Sector

 

    1. Indian

        a.   Benchmark Asset Management Co. Private Ltd.

        b.   Cholamandalam Asset Management Co. Ltd.

     c.   Credit Capital Asset Management Co. Ltd.

        d.   Escorts Asset Management Ltd.

        e.   J. M. Financial Asset Management Private Ltd.    

   f.    Kotak Mahindra Asset Management Co. Ltd.

        g.   Quantum Asset Management Co. Private Ltd.

        h.   Reliance Capital Asset Management Ltd.

        i.   Sahara Asset Management Co. Private Ltd

        j.   Sundaram Asset Management Co. Ltd.

        k.   Tata Asset Management Ltd.

  

   2. Joint Ventures - Predominantly Indian

       a.  Birla Sun Life Asset Management Co. Ltd.

      

  b.  DSP Merrill Lynch Fund Managers Ltd.

        c.  HDFC Asset Management Co. Ltd.

        d.  Prudential ICICI Asset Management Co. Ltd.

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   3. Joint Ventures - Predominantly Foreign

        a.  ABN AMRO Asset Management (India) Ltd.

        b.  Deutsche Asset Management (India) Private Ltd.

        c.  Fidelity Fund Management Private Ltd.

        d.  Franklin Templeton Asset Management (India) Private Ltd.

        e.  HSBC Asset Management (India) Private Ltd.

        f.  ING Investment Management (India) Private Ltd.

        g.  Morgan Stanley Investment Management Private Ltd.

h. Principal Pnb Asset Management Co. Private Ltd.

i. Standard Chartered Asset Management Co. Private Ltd.

Assets Under Management (AUM) as at the end of MAR-2009 (Rs in Lakhs)

Sr No Mutual Fund Name Average AUM For The Month

Excluding Fund of Fund Of Funds -

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Funds - Domestic butincluding Fund ofFunds - Overseas

Domestic

1 AIG Global Investment Group Mutual Fund 137694.56 0

2 Baroda Pioneer Mutual Fund 113201.06 0

3 Benchmark Mutual Fund 106856.68 0

4 Bharti AXA Mutual Fund 19651.85 0

5 Birla Sun Life Mutual Fund 4709622.86 1478.04

6 Canara Robeco Mutual Fund 474388.13 0

7 DBS Chola Mutual Fund 102349.02 0

8 Deutsche Mutual Fund 935510.47 0

9 DSP BlackRock Mutual Fund 1441273.29 0

10 Edelweiss Mutual Fund 2228.34 0

11 Escorts Mutual Fund 18152.64 0

12 Fidelity Mutual Fund 617290.87 2822.87

13 Fortis Mutual Fund 581105.21 10648.00

14 Franklin Templeton Mutual Fund 1920529.86 16000.64

15 Goldman Sachs Mutual Fund N/A N/A

16 HDFC Mutual Fund 5795644.71 0

17 HSBC Mutual Fund 957519.09 0

18 ICICI Prudential Mutual Fund 5143250.24 2360.94

19 IDFC Mutual Fund 1436219.88 1441.08

20 ING Mutual Fund 252874.88 18485.84

21 JM Financial Mutual Fund 478756.21 0

22 JPMorgan Mutual Fund 245352.91 0

23 Kotak Mahindra Mutual Fund 1820404.34 16592.36

24 LIC Mutual Fund 2309237.33 0

25 Mirae Asset Mutual Fund 16208.46 0

26 Morgan Stanley Mutual Fund 134585.41 0

27 PRINCIPAL Mutual Fund 675687.05 0

28 Quantum Mutual Fund 5675.51 0

29 Reliance Mutual Fund 8096293.55 0

30 Religare AEGON Mutual Fund N/A N/A

31 Religare Mutual Fund 602283.90 0

32 Sahara Mutual Fund 14592.57 0

33 SBI Mutual Fund 2638268.15 0

34 Shinsei Mutual Fund N/A N/A

35 Sundaram BNP Paribas Mutual Fund 926706.92 0

36 Tata Mutual Fund 1702987.17 0

37 Taurus Mutual Fund 20836.41 0

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38 UTI Mutual Fund 4875417.00 0

Grand Total 49328656.53 69829.77

(Table-1)

4.4 ORGANISATION AND MANAGEMENT OF MUTUAL FUNDS:-

In India Mutual Fund usually formed as trusts, three parties are generally involved viz.

Settler of the trust or the sponsoring organization.

The trust formed under the Indian trust act, 1982 or the trust company

registered under the Indian companies act, 1956

Fund mangers or The merchant-banking unit

Custodians.

STRUCTURE OF A MUTUAL FUND

(Figure-3)

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Sponsor

Mutual fund

Trustees

ASSET MANAGEMENT COMPANY

Custodian

Registrar

The structure of mutual fund in India is governed by SEBI (MUTUAL FUND)

regulations 1996. These regulations make it mandatory for mutual funds to have a three-

tier structure of SPONSOR-TRUSTEE-ASSET MANAGEMENT COMPANY (AMC).

Organizational set up of mutual fund

(Figure-4)

MUTUAL FUNDS TRUST:-

Mutual fund trust is created by the sponsors under the Indian trust act, 1982, which is

the main body in the creation of Mutual Fund trust.

The main functions of Mutual Fund trust are as follows:

Planning and formulating Mutual Funds schemes.

Seeking SEBI’s approval and authorization to these schemes.

Marketing the schemes for public subscription.

Seeking RBI approval in case NRI’s subscription to Mutual Fund is Invited

Attending to trusteeship function. This function as per guidelines can be

assigned to separately established trust companies too. Trustees are required to

submit a consolidated report six monthly to SEBI to ensure that the guidelines

are fully being complied with trusted are also required to submit an annual

report to the investors in the fund.

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FUND MANAGERS (OR) THE ASSES MANAGEMENT COMPANY

(AMC)

AMC has to discharge mainly three functions as under:

I. Taking investment decisions and making investments of the funds through

market dealer/brokers in the secondary market securities or directly in the

primary capital market or money market instruments

II. Realize fund position by taking account of all receivables and realizations,

moving corporate actions involving declaration of dividends,etc to compensate

investors for their investments in units; and

III. Maintaining proper accounting and information for pricing the units and arriving

at net asset value (NAV), the information about the listed schemes and the

transactions of units in the secondary market. AMC has to feed back the trustees

about its fund management operations and has to maintain a perfect information

system.

CUSTODIANS OF MUTUAL FUNDS:-

Mutual funds run by the subsidiaries of the nationalized banks had their respective

sponsor banks as custodians like canara bank, SBI, PNB, etc. Foreign banks with

higher degree of automation in handling the securities have assumed the role of

custodians for mutual funds. With the establishment of stock Holding Corporation

of India the work of custodian for mutual funds is now being handled by it for

various mutual funds. Besides, industrial investment trust company acts as sub-

custodian for stock Holding Corporation of India for domestic schemes of UTI,

BOI MF, LIC MF, etc

Fee structure:- Custodian charges ranges between 0.15% to 0.20% on the net

value of the customer’s holding for custodian services space is one important

factor which has fixed cost element.

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RESPONSIBILITY OF CUSTODIANS: -

Receipt and delivery of securities

Holding of securities.

Collecting income

Holding and processing cost

Corporate actions etc

FUNCTIONS OF CUSTOMERS

Safe custody

Trade settlement

Corporate action

Transfer agents

RATE OF RETURN ON MUTUAL FUNDS:-

An investor in mutual fund earns return from two sources:

Income from dividend paid by the mutual fund.

Capital gains arising out of selling the units at a price higher than the

acquisition price

Formation and regulations:

1. Mutual funds are to be established in the form of trusts under the Indian trusts

act and are to be operated by separate asset management companies (AMC s)

2. AMC’s shall have a minimum Net worth of Rs. 5 crores;

3. AMC’s and Trustees of Mutual Funds are to be two separate legal entities and

that an AMC or its affiliate cannot act as a manager in any other fund;

4. Mutual funds dealing exclusively with money market instruments are to be

regulated by the Reserve Bank Of India

5. Mutual fund dealing primarily in the capital market and also partly money

market instruments are to be regulated by the Securities Exchange Board Of

India (SEBI)

6. All schemes floated by Mutual funds are to be registered with SEBI

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Schemes:-

1. Mutual funds are allowed to start and operate both closed-end and open-end

schemes;

2. Each closed-end schemes must have a Minimum corpus (pooling up) of Rs 20

crore;

3. Each open-end scheme must have a Minimum corpus of Rs 50 crore

4. In the case of a Closed –End scheme if the Minimum amount of Rs 20 crore

or 60% of the target amount, which ever is higher is not raised then the entire

subscription has to be refunded to the investors;

5. In the case of an Open-Ended schemes, if the Minimum amount of Rs 50 crore

or 60 percent of the targeted amount, which ever is higher, is no raised then

the entire subscription has to be refunded to the investors.

Investment norms:-

1. No mutual fund, under all its schemes can own more than five percent of any

company’s paid up capital carrying voting rights;

2. No mutual fund, under all its schemes taken together can invest more than 10

percent of its funds in shares or debentures or other instruments of any single

company;

3. No mutual fund, under all its schemes taken together can invest more than 15

percent of its fund in the shares and debentures of any specific industry, except

those schemes which are specifically floated for investment in one or more

specified industries in respect to which a declaration has been made in the offer

letter.

4. No individual scheme of mutual funds can invest more than five percent of its

corpus in any one company’s share;

5. Mutual funds can invest only in transferable securities either in the money or in

the capital market. Privately placed debentures, securitized debt, and other

unquoted debt, and other unquoted debt instruments holding cannot exceed 10

percent in the case of growth funds and 40 percent in the case of income funds.

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Distribution:

Mutual funds are required to distribute at least 90 percent of their profits annually in

any given year. Besides these, there are guidelines governing the operations of mutual

funds in dealing with shares and also seeking to ensure greater investor protection

through detailed disclosure and reporting by the mutual funds. SEBI has also been

granted with powers to over see the constitution as well as the operations of mutual

funds, including a common advertising code. Besides, SEBI can impose penalties on

Mutual funds after due investigation for their failure to comply with the guidelines.

4.5 INVESTORS PROFILE:

An investor normally prioritizes his investment needs before undertaking an

investment, so different goals will be allocated to different proportions of the total

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disposable amount. Investments for specific goals normally find their way into the debt

market as risk reduction is of prime importance, this is the area for the risk-averse

investors and here, Mutual Funds are generally the best option. One can avail of the

benefits of better returns with added benefits of anytime liquidity by investing in open-

ended debt funds at lower risk, this risk of default by any company that one has chosen

to invest in, can be minimized by investing in Mutual Funds as the fund managers

analyze the companies financials more minutely than an individual can do as they have

the expertise to do so.

Moving up the risk spectrum, there are people who would like to take some risk and

invest in equity funds/capital market. However, since their appetite for risk is also

limited, they would rather have some exposure to debt as well. For these investors,

balanced funds provide an easy route of investment, armed with expertise of investment

techniques, they can invest in equity as well as good quality debt thereby reducing risks

and providing the investor with better returns than he could otherwise manage. Since

they can reshuffle their portfolio as per market conditions, they are likely to generate

moderate returns even in pessimistic market conditions.

Next comes the risk takers, risk takers by their nature, would not be averse to investing

in high-risk avenues. Capital markets find their fancy more often than not, because they

have historically generated better returns than any other avenue, provided, the money

was judiciously invested. Though the risk associated is generally on the higher side of

the spectrum, the return-potential compensates for the risk attached.

4.5.1 Who Can Invest In Mutual Funds In India?

Mutual funds in India are open to investment by:

a) Residents including

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1) Resident Indian Individuals

2) Indian Companies

3) Indian Trusts/Charitable Institutions

4) Banks

5) Non-Banking Finance Companies

6) Insurance Companies

7) Provident Funds

b) Non Residents including

1) Non-Resident Indians, and

2) Overseas Corporate Bodies (OCBs) and

c) Foreign entities, viz;

1) Foreign Institutional Investors (FIIs) registered with SEBI.

Foreign citizens/ entities are however not allowed to invest in Mutual funds in

India.

4.5.2 Five Easy Steps to Invest in Mutual Funds

1) Search: “Where to look for if we want to invest in MF”

a) Contacting an Investment advisor in a bank or a brokerage house or an Independent

Financial Advisor is the first step to gathering information.

b) Mutual funds units can also be bought over the Internet.

c) Mutual funds are much like any other product, in that there are manufacturers who

provide the product and there are dealers who sell them.

2) Evaluation: “Evaluation: choosing the right mutual fund for you

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As an investor one may

a) For the short term or long term want to invest

b) Want regular income or growth

c) Want to target lower risk or higher returns

d) Be convinced of a particular sector and want to invest in it

3) Purchase:

a) Systematic Investment Plan (SIP): Allows you to save a part of your income

regularly, also used to reduce risk when investing in schemes targeting aggressive

growth.

b) Systematic Withdrawal Plan (SWP): Allows you to withdraw a part of your

investment regularly. Used when you want to withdraw your investment for a specific

regular payment, like insurance premium payments of monthly/quarterly frequency.

c) Automatic debit: Saves the hassle of writing a cheque when making an investment.

Your account is debited automatically for the amount invested.

d) Dividend Plan:

A) Dividend Payout: Under this plan investor can redeem his/her dividend at specific

times.

B) Dividend Reinvestment: Under this plan investor’s dividend is reinvested back to its

principal amount which therefore increases the number of units investor is holding.

e) Growth: Under this plan income generated from investment will put back to its

invested amount which therefore increases the value of each unit customer is holding.

4) Post Purchase Monitoring:

Once you have invested in an ongoing fund, expect a period of two to three days before you receive an account statement on the address mentioned by you in your application form.

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a) The Account Statement

Your account statement indicates your current holding in the scheme that you have

invested.

b) The transaction slip: The transaction slip at the end of the account statement can be

used for additional purchases, redemptions or to intimate the mutual fund on any change

in bank mandates/address.

c) NAV: The NAVs of all the open-ended schemes are published at the fund's website,

financial newspapers and AMFI (Association of Mutual Funds) web-site

www.amfiindia.com.

5) EXIT:

Every AMC advice that every investor should monitor his/her units NAV periodically but

AMC also recommend their unit holders to not get swayed by short term considerations

in deciding their exit.

Redemption: In case of open ended funds investor can redeem his/her invested amount.

Most funds take 1-3 days to credit your account with your redemption proceeds.

4.5.3 Comparison of Investment products:

Investor tends to constantly compare one form of investment with other Investors

certainly look for the best returns for different option. However, to determine which

25

option is better, the comparison should be made in terms of other benefits that the

investor ought to look for in any investment.

Investment Objective

Returns Risk Tolerance

Investment Horizon

Liquidity

Equity Capital appreciation

High High Long term High

FI Bonds Income Moderate Low Med-long Moderate

Corporate Debentures

Income Moderate High Med Low

Corporate FDs Income Moderate High Med Low

Bank Deposits Income Low Generally low Flexible High

PPF Income Moderate Low Long term Moderate

Life Insurance Risk cover Low Low Long term Low

Gold Inflation hedge Moderate Low Long term Moderate

Real Estate Inflation hedge High Low Long term Low

Mutual Funds Capital growth & Income

High High Flexible High

(Table-2)

4.5.4 THE FIVE MOST COMMON MISTAKES MUTUAL FUND INVESTORS MAKE

Failing to stay invested for a longer period

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Worrying about portfolio turnover or dividends it pays

Being affected by new in the market when you’re supposed to be investing for the

long term

Selling out during bad markets

Being impatient and losing confidence too soon.

INVESTORS THINK LONG TERM BUT ACT SHORT TERM…..

4.6 TYPES OF MUTUAL FUNDS

General Classification of Mutual Funds

Open-end Funds | Closed-end Funds

Open-end Funds

Funds that can sell and purchase units at any point in time are classified as Open-end

Funds. The fund size (corpus) of an open-end fund is variable (keeps changing) because

of continuous selling (to investors) and repurchases (from the investors) by the fund. An

open-end fund is not required to keep selling new units to the investors at all times but is

required to always repurchase, when an investor wants to sell his units. The NAV of an

open-end fund is calculated every day.

Closed-end Funds

Funds that can sell a fixed number of units only during the New Fund Offer (NFO) period

are known as Closed-end Funds. The corpus of a Closed-end Fund remains unchanged at

all times. After the closure of the offer, buying and redemption of units by the investors

27

directly from the Funds is not allowed. However, to protect the interests of the investors,

SEBI provides investors with two avenues to liquidate their positions:

1. Closed-end Funds are listed on the stock exchanges where investors can buy/sell

units from/to each other. The trading is generally done at a discount to the NAV

of the scheme. The NAV of a closed-end fund is computed on a weekly basis

(updated every Thursday).

2. Closed-end Funds may also offer “buy-back of units” to the unit holders. In this

case, the corpus of the Fund and its outstanding units do get changed.

Load Funds | No-load Funds

Load Funds

Mutual Funds incur various expenses on marketing, distribution, advertising, portfolio

churning, fund manager’s salary etc. Many funds recover these expenses from the

investors in the form of load. These funds are known as Load Funds. A load fund may

impose following types of loads on the investors:

Entry Load – Also known as Front-end load, it refers to the load charged to an

investor at the time of his entry into a scheme. Entry load is deducted from the

investor’s contribution amount to the fund.

Exit Load – Also known as Back-end load, these charges are imposed on an

investor when he redeems his units (exits from the scheme). Exit load is deducted

from the redemption proceeds to an outgoing investor.

Deferred Load – Deferred load is charged to the scheme over a period of time.

Contingent Deferred Sales Charge (CDSC) – In some schemes, the percentage

of exit load reduces as the investor stays longer with the fund. This type of load is

known as Contingent Deferred Sales Charge.

No-load Funds

All those funds that do not charge any of the above mentioned loads are known as No-

load Funds.

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Tax-exempt Funds | Non-Tax-exempt Funds

Tax-exempt Funds

Funds that invest in securities free from tax are known as Tax-exempt Funds. All open-

end equity oriented funds are exempt from distribution tax (tax for distributing income to

investors). Long term capital gains and dividend income in the hands of investors are tax-

free.

Non-Tax-exempt Funds

Funds that invest in taxable securities are known as Non-Tax-exempt Funds. In India, all

funds, except open-end equity oriented funds are liable to pay tax on distribution income.

Profits arising out of sale of units by an investor within 12 months of purchase are

categorized as short-term capital gains, which are taxable. Sale of units of an equity

oriented fund is subject to Securities Transaction Tax (STT). STT is deducted from the

redemption proceeds to an investor.

BROAD MUTUAL FUND TYPES

29

(Figure-5)

1. Equity Funds

Equity funds are considered to be the more risky funds as compared to other fund types,

but they also provide higher returns than other funds. It is advisable that an investor

looking to invest in an equity fund should invest for long term i.e. for 3 years or more.

There are different types of equity funds each falling into different risk bracket. In the

order of decreasing risk level, there are following types of equity funds:

a. Aggressive Growth Funds – In Aggressive Growth Funds, fund managers aspire

for maximum capital appreciation and invest in less researched shares of

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speculative nature. Because of these speculative investments Aggressive Growth

Funds become more volatile and thus, are prone to higher risk than other equity

funds.

b. Growth Funds – Growth Funds also invest for capital appreciation (with time

horizon of 3 to 5 years) but they are different from Aggressive Growth Funds in

the sense that they invest in companies that are expected to outperform the market

in the future. Without entirely adopting speculative strategies, Growth Funds

invest in those companies that are expected to post above average earnings in the

future.

c. Speciality Funds – Speciality Funds have stated criteria for investments and their

portfolio comprises of only those companies that meet their criteria. Criteria for

some speciality funds could be to invest/not to invest in particular

regions/companies. Speciality funds are concentrated and thus, are comparatively

riskier than diversified funds.. There are following types of speciality funds:

i. Sector Funds: Equity funds that invest in a particular sector/industry of

the market are known as Sector Funds. The exposure of these funds is

limited to a particular sector (say Information Technology, Auto, Banking,

Pharmaceuticals or Fast Moving Consumer Goods) which is why they are

more risky than equity funds that invest in multiple sectors.

ii. Foreign Securities Funds: Foreign Securities Equity Funds have the

option to invest in one or more foreign companies. Foreign securities

funds achieve international diversification and hence they are less risky

than sector funds. However, foreign securities funds are exposed to

foreign exchange rate risk and country risk.

iii. Mid-Cap or Small-Cap Funds: Funds that invest in companies having

lower market capitalization than large capitalization companies are called

Mid-Cap or Small-Cap Funds. Market capitalization of Mid-Cap

companies is less than that of big, blue chip companies (less than Rs. 2500

crores but more than Rs. 500 crores) and Small-Cap companies have

market capitalization of less than Rs. 500 crores. Market Capitalization of

a company can be calculated by multiplying the market price of the

31

company’s share by the total number of its outstanding shares in the

market. The shares of Mid-Cap or Small-Cap Companies are not as liquid

as of Large-Cap Companies which gives rise to volatility in share prices of

these companies and consequently, investment gets risky.

iv. Option Income Funds*: While not yet available in India, Option Income

Funds write options on a large fraction of their portfolio. Proper use of

options can help to reduce volatility, which is otherwise considered as a

risky instrument. These funds invest in big, high dividend yielding

companies, and then sell options against their stock positions, which

generate stable income for investors.

d. Diversified Equity Funds – Except for a small portion of investment in liquid

money market, diversified equity funds invest mainly in equities without any

concentration on a particular sector(s). These funds are well diversified and

reduce sector-specific or company-specific risk. However, like all other funds

diversified equity funds too are exposed to equity market risk. One prominent

type of diversified equity fund in India is Equity Linked Savings Schemes

(ELSS). As per the mandate, a minimum of 90% of investments by ELSS should

be in equities at all times. ELSS investors are eligible to claim deduction from

taxable income (up to Rs 1 lakh) at the time of filing the income tax return. ELSS

usually has a lock-in period and in case of any redemption by the investor before

the expiry of the lock-in period makes him liable to pay income tax on such

income(s) for which he may have received any tax exemption(s) in the past.

e. Equity Index Funds – Equity Index Funds have the objective to match the

performance of a specific stock market index. The portfolio of these funds

comprises of the same companies that form the index and is constituted in the

same proportion as the index. Equity index funds that follow broad indices (like

S&P CNX Nifty, Sensex) are less risky than equity index funds that follow

narrow sectoral indices (like BSEBANKEX or CNX Bank Index etc). Narrow

indices are less diversified and therefore, are more risky.

f. Value Funds – Value Funds invest in those companies that have sound

fundamentals and whose share prices are currently under-valued. The portfolio of

32

these funds comprises of shares that are trading at a low Price to Earning Ratio

(Market Price per Share / Earning per Share) and a low Market to Book Value

(Fundamental Value) Ratio. Value Funds may select companies from diversified

sectors and are exposed to lower risk level as compared to growth funds or

speciality funds. Value stocks are generally from cyclical industries (such as

cement, steel, sugar etc.) which make them volatile in the short-term. Therefore, it

is advisable to invest in Value funds with a long-term time horizon as risk in the

long term, to a large extent, is reduced.

g. Equity Income or Dividend Yield Funds – The objective of Equity Income or

Dividend Yield Equity Funds is to generate high recurring income and steady

capital appreciation for investors by investing in those companies which issue

high dividends (such as Power or Utility companies whose share prices fluctuate

comparatively lesser than other companies’ share prices). Equity Income or

Dividend Yield Equity Funds are generally exposed to the lowest risk level as

compared to other equity funds

2. Debt / Income Funds

Funds that invest in medium to long-term debt instruments issued by private companies,

banks, financial institutions, governments and other entities belonging to various sectors

(like infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are

low risk profile funds that seek to generate fixed current income (and not capital

appreciation) to investors. In order to ensure regular income to investors, debt (or

income) funds distribute large fraction of their surplus to investors. Although debt

securities are generally less risky than equities, they are subject to credit risk (risk of

default) by the issuer at the time of interest or principal payment. To minimize the risk of

default, debt funds usually invest in securities from issuers who are rated by credit rating

agencies and are considered to be of “Investment Grade”. Debt funds that target high

returns are more risky. Based on different investment objectives, there can be following

types of debt funds:

a. Diversified Debt Funds – Debt funds that invest in all securities issued by

entities belonging to all sectors of the market are known as diversified debt funds.

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The best feature of diversified debt funds is that investments are properly

diversified into all sectors which results in risk reduction. Any loss incurred, on

account of default by a debt issuer, is shared by all investors which further

reduces risk for an individual investor.

b. Focused Debt Funds* - Unlike diversified debt funds, focused debt funds are

narrow focus funds that are confined to investments in selective debt securities,

issued by companies of a specific sector or industry or origin. Some examples of

focused debt funds are sector, specialized and offshore debt funds, funds that

invest only in Tax Free Infrastructure or Municipal Bonds. Because of their

narrow orientation, focused debt funds are more risky as compared to diversified

debt funds. Although not yet available in India, these funds are conceivable and

may be offered to investors very soon.

c. High Yield Debt funds – As we now understand that risk of default is present in

all debt funds, and therefore, debt funds generally try to minimize the risk of

default by investing in securities issued by only those borrowers who are

considered to be of “investment grade”. But, High Yield Debt Funds adopt a

different strategy and prefer securities issued by those issuers who are considered

to be of “below investment grade”. The motive behind adopting this sort of risky

strategy is to earn higher interest returns from these issuers. These funds are more

volatile and bear higher default risk, although they may earn at times higher

returns for investors.

d. Assured Return Funds – Although it is not necessary that a fund will meet its

objectives or provide assured returns to investors, but there can be funds that

come with a lock-in period and offer assurance of annual returns to investors

during the lock-in period. Any shortfall in returns is suffered by the sponsors or

the Asset Management Companies (AMCs). These funds are generally debt funds

and provide investors with a low-risk investment opportunity. However, the

security of investments depends upon the net worth of the guarantor (whose name

is specified in advance on the offer document). To safeguard the interests of

investors, SEBI permits only those funds to offer assured return schemes whose

sponsors have adequate net-worth to guarantee returns in the future. In the past,

34

UTI had offered assured return schemes (i.e. Monthly Income Plans of UTI) that

assured specified returns to investors in the future. UTI was not able to fulfill its

promises and faced large shortfalls in returns. Eventually, government had to

intervene and took over UTI’s payment obligations on itself. Currently, no AMC

in India offers assured return schemes to investors, though possible.

e. Fixed Term Plan Series – Fixed Term Plan Series usually are closed-end

schemes having short term maturity period (of less than one year) that offer a

series of plans and issue units to investors at regular intervals. Unlike closed-end

funds, fixed term plans are not listed on the exchanges. Fixed term plan series

usually invest in debt / income schemes and target short-term investors. The

objective of fixed term plan schemes is to gratify investors by generating some

expected returns in a short period.

3. Gilt Funds

Also known as Government Securities in India, Gilt Funds invest in government papers

(named dated securities) having medium to long term maturity period. Issued by the

Government of India, these investments have little credit risk (risk of default) and provide

safety of principal to the investors. However, like all debt funds, gilt funds too are

exposed to interest rate risk. Interest rates and prices of debt securities are inversely

related and any change in the interest rates results in a change in the NAV of debt/gilt

funds in an opposite direction.

4. Money Market / Liquid Funds

Money market / liquid funds invest in short-term (maturing within one year) interest

bearing debt instruments. These securities are highly liquid and provide safety of

investment, thus making money market / liquid funds the safest investment option when

compared with other mutual fund types. However, even money market / liquid funds are

exposed to the interest rate risk. The typical investment options for liquid funds include

Treasury Bills (issued by governments), Commercial papers (issued by companies) and

Certificates of Deposit (issued by banks).

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5. Hybrid Funds

As the name suggests, hybrid funds are those funds whose portfolio includes a blend of

equities, debts and money market securities. Hybrid funds have an equal proportion of

debt and equity in their portfolio. There are following types of hybrid funds in India:

a. Balanced Funds – The portfolio of balanced funds include assets like debt

securities, convertible securities, and equity and preference shares held in a

relatively equal proportion. The objectives of balanced funds are to reward

investors with a regular income, moderate capital appreciation and at the same

time minimizing the risk of capital erosion. Balanced funds are appropriate for

conservative investors having a long term investment horizon.

b. Growth-and-Income Funds – Funds that combine features of growth funds and

income funds are known as Growth-and-Income Funds. These funds invest in

companies having potential for capital appreciation and those known for issuing

high dividends. The level of risks involved in these funds is lower than growth

funds and higher than income funds.

c. Asset Allocation Funds – Mutual funds may invest in financial assets like equity,

debt, money market or non-financial (physical) assets like real estate, commodities

etc.. Asset allocation funds adopt a variable asset allocation strategy that allows

fund managers to switch over from one asset class to another at any time

depending upon their outlook for specific markets. In other words, fund managers

may switch over to equity if they expect equity market to provide good returns

and switch over to debt if they expect debt market to provide better returns. It

should be noted that switching over from one asset class to another is a decision

taken by the fund manager on the basis of his own judgment and understanding of

specific markets, and therefore, the success of these funds depends upon the skill

of a fund manager in anticipating market trends.

6. Commodity Funds

Those funds that focus on investing in different commodities (like metals, food grains,

crude oil etc.) or commodity companies or commodity futures contracts are termed as

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Commodity Funds. A commodity fund that invests in a single commodity or a group of

commodities is a specialized commodity fund and a commodity fund that invests in all

available commodities is a diversified commodity fund and bears less risk than a

specialized commodity fund. “Precious Metals Fund” and Gold Funds (that invest in

gold, gold futures or shares of gold mines) are common examples of commodity funds.

7. Real Estate Funds

Funds that invest directly in real estate or lend to real estate developers or invest in

shares/securitized assets of housing finance companies, are known as Specialized Real

Estate Funds. The objective of these funds may be to generate regular income for

investors or capital appreciation.

8. Exchange Traded Funds (ETF)

Exchange Traded Funds provide investors with combined benefits of a closed-end and an

open-end mutual fund. Exchange Traded Funds follow stock market indices and are

traded on stock exchanges like a single stock at index linked prices. The biggest

advantage offered by these funds is that they offer diversification, flexibility of holding a

single share (tradable at index linked prices) at the same time. Recently introduced in

India, these funds are quite popular abroad.

9. Fund of Funds

Mutual funds that do not invest in financial or physical assets, but do invest in other

mutual fund schemes offered by different AMCs, are known as Fund of Funds. Fund of

Funds maintain a portfolio comprising of units of other mutual fund schemes, just like

conventional mutual funds maintain a portfolio comprising of equity/debt/money market

instruments or non financial assets. Fund of Funds provide investors with an added

advantage of diversifying into different mutual fund schemes with even a small amount

of investment, which further helps in diversification of risks. However, the expenses of

Fund of Funds are quite high on account of compounding expenses of investments into

different mutual fund schemes.

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* Funds not yet available in India

4.7 VALUATION OF MUTUAL FUND

The net asset value of the Fund is the cumulative market value of the assets Fund net of

its liabilities. In other words, if the Fund is dissolved or liquidated, by selling off all the

assets in the Fund, this is the amount that the shareholders would collectively own. This

gives rise to the concept of net asset value per unit, which is the value, represented by the

ownership of one unit in the Fund. It is calculated simply by dividing the net asset value

of the Fund by the number of units. However, most people refer loosely to the NAV per

unit as NAV, ignoring the “per unit”. We also abide by the same convention.

Calculation of NAV

The most important part of the calculation is the valuation of the assets owned by the

Fund. Once it is calculated, the NAV is simply the net value of assets divided by the

number of units outstanding. The detailed methodology for the calculation of the net asset

value is given below.

The net asset value is the actual value of a unit on any business day. NAV is the

barometer of the performance of the scheme. The net asset value is the market value of

the assets of the scheme minus its liabilities and expenses. The per unit NAV is the net

asset value of the scheme divided by the number of the units outstanding on the valuation

date.

4.8 MUTUAL FUND SCHEME TYPES:

Equity Diversified Schemes

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These schemes, also commonly called Growth Schemes, seek to invest a majority of their

funds in equities and a small portion in money market instruments. They seek to achieve

long-term capital appreciation by responding to the dynamically changing Indian

economy by moving across sectors such as Lifestyle, Pharma, Cyclical, Technology,

etc.

Sector Schemes

These schemes focus on particular sector as IT, Banking, etc. They seek to generate

long-term capital appreciation by investing in equity and related securities of

companies in that particular sector.

Index Schemes

These schemes aim to provide returns that closely correspond to the return of a

particular stock market index such as BSE Sensex, NSE Nifty, etc. Such schemes invest

in all the stocks comprising the index in approximately the same weightage as they are

given in that index.

Exchange Traded Funds (ETFs)

ETFs invest in stocks underlying a particular stock index like NSE Nifty or BSE

Sensex. They are similar to an index fund with one crucial difference. ETFs are listed

and traded on a stock exchange. In contrast, an index fund is bought and sold by the

fund and its distributors.

Equity Tax Saving Schemes

These work on similar lines as diversified equity funds and seek to achieve long-term

capital appreciation by investing in the entire universe of stocks. The only difference

between these funds and equity-diversified funds is that they demand a lock-in of 3

years to gain tax benefits.

Dynamic Funds

These schemes alter their exposure to different asset classes based on the market

scenario. Such funds typically try to book profits when the markets are overvalued and

39

remain fully invested in equities when the markets are undervalued. This is suitable for

investors who find it difficult to decide when to quit from equity.

Balanced Schemes

The aim of Balanced Funds is to provide both growth and regular income. Such schemes

periodically distribute a part of their earning and invest both in equities and fixed income

securities in the proportion indicated in their offer documents. This proportion affects the

risks and the returns associated with the balanced fund – in case equities are allocated a

higher proportion, investors would be exposed to risks similar to that of the equity

market.

Balanced funds with equal allocation to equities and fixed income securities are ideal for

investors looking for a combination of income and moderate growth These schemes seek

to achieve long-term capital appreciation with stability of investment and current

income from a balanced portfolio of high quality equity and fixed-income securities.

Medium-Term Debt Schemes

These schemes have a portfolio of debt and money market instruments where the

average maturity of the underlying portfolio is in the range of five to seven years.

Short-Term Debt Schemes

These schemes have a portfolio of debt and money market instruments where the

average maturity of the underlying portfolio is in the range of one to two years.

Money Market Debt Schemes

These schemes invest in debt securities of a short-term nature, which generally means

securities of less than one-year maturity. The typical short-term interest-bearing

instruments these funds invest in Treasury Bills, Certificates of Deposit, Commercial

Paper and Inter-Bank Call Money Market.

Medium-Term Gilt Schemes

These schemes invest in government securities. The average maturity of the securities

in the scheme is over three years.

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Short-Term Gilt Schemes

These schemes invest in government securities. The securities invested in are of short to

medium term maturities.

Floating Rate Funds

They invest in debt securities with floating interest rates, which are generally linked to

some benchmark rate like MIBOR. Floating rate funds have a high relevance when

interest rates are on the rise helping investors to ride the interest rate rise.

Monthly Income Plans (MIPS)

These are basically debt schemes, which make marginal investments in the range of 10-

25% in equity to boost the scheme’s returns. MIP schemes are ideal for investors who

seek slightly higher return that pure long-term debt schemes at marginally higher risk.

4.9 DIFFERENT MODES OF RECEIVING THE INCOME EARNED

FROM MUTUAL FUND INVESTMENTS

Mutual Funds offer three methods of receiving income:

Growth Plan

In this plan, dividend is neither declared nor paid out to the investor but is built into the

value of the NAV. In other words, the NAV increases over time due to such incomes

and the investor realizes only the capital appreciation on redemption of his investment.

Income Plan

In this plan, dividends are paid-out to the investor. In other words, the NAV only

reflects the capital appreciation or depreciation in market price of the underlying

portfolio.

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Dividend Re-investment Plan

In this case, dividend is declared but not paid out to the investor, instead, it is

reinvested back into the scheme at the then prevailing NAV. In other words, the

investor is given additional units and not cash as dividend.

MUTUAL FUND INVESTING STRATEGIES:

1. Systematic Investment Plans (SIPs)

These are best suited for young people who have started their careers and need to build

their wealth. SIPs entail an investor to invest a fixed sum of money at regular intervals

in the Mutual fund scheme the investor has chosen, an investor opting for SIP in xyz

Mutual Fund scheme will need to invest a certain sum on money every

month/quarter/half-year in the scheme.

2. Systematic Withdrawal Plans (SWPs)

These plans are best suited for people nearing retirement. In these plans, an investor

invests in a mutual fund scheme and is allowed to withdraw a fixed sum of money at

regular intervals to take care of his expenses.

3. Systematic Transfer Plans (STPs)

They allow the investor to transfer on a periodic basis a specified amount from one

scheme to another within the same fund family – meaning two schemes belonging to

the same mutual fund. A transfer will be treated as redemption of units from the scheme

from which the transfer is made. Such redemption or investment will be at the

applicable NAV. This service allows the investor to manage his investments actively to

achieve his objectives. Many funds do not even charge any transaction fees for his

service – an added advantage for the active investor.

4.10 ADVANTAGES OF INVESTING THROUGH MUTUAL

FUNDS :

42

There are several reasons that can be attributed to the growing popularity and suitability

of Mutual Funds as an investment vehicle especially for retail investors:

ASSET ALLOCATION

Mutual Funds offer the investors a valuable tool – Asset Allocation. This is

explained by an example.

An investor investing Rs.1 lakh in a mutual fund scheme, which has collected Rs.100

crores and invested the money in various investment options, will have Rs.1 lakh spread

over a number of investment options as demonstrated below:

Investment TypePercentage of

Allocation (% of

total portfolio)

Total portfolio of

the Mutual Fund

scheme (Rs. In

crores)

Investors portfolio

allocation (Rs.)

EQUITY: 57% 57 57,000

State Bank of India 15% 15 15,000

Infosys Technologies 12% 12 12,000

ABB 10% 10 10,000

Reliance Industries 9% 9 9,000

MICO 7% 7 7,000

Tata Power 4% 4 4,000

DEBT: 43% 43 43,000

Govt. Securities 20% 20 20,000

Company Debentures 10% 10 10,000

Institution Bonds 9% 9 9,000

Money Market 4% 4 4,000

Total 100% 100 1,00,000

(Table-3)

Thus ‘Asset Allocation’ is allocating your investments in to different investment

options depending on your risk profile and return expectations.

DIVERSIFICATION

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Diversification is spreading your investment amount over a larger number of

investments in order to reduce risk. For instance, if you have Rs.10,000 to invest in

Information Technology (IT) stocks, this amount will only buy you a handful of

stocks of perhaps one or two companies. A fall in the market price of any of these

company stocks will significantly erode your investment amount instead it makes

sense to invest in an IT sector mutual fund scheme so that your Rs.10,000 is spread

across a larger number of stocks thereby reducing your risk.

PROFESSIONALS AT WORK

Few investors have the time or expertise to manage their personal investments every

day, to efficiently reinvest interest or dividend income, or to investigate the

thousands of securities available in the financial markets. Fund managers are

professionals and experienced in tracking the finance markets, having access to

extensive research and market information, which enables them to decide which

securities to buy and sell for the fund. For an individual investor like you, this

professionalism is built in when you invest in the Mutual Fund.

REDUCTION OF TRANSACTION COSTS

While investing directly in securities, all the costs of investing such as brokerage,

custodial services etc. Borne by you are at the highest rates due to small transaction

sizes. However, when going through a fund, you have the benefit of economies of

scale; the fund pays lesser costs because of larger volumes, a benefit passed on to its

investors like you.

EASY ACCESS TO YOUR MONEY

This is one of the most important benefits of a Mutual Fund. Often you hold shares

or bonds that you cannot directly, easily and quickly sell. In such situations, it could

take several days or even longer before you are able to liquidate his Mutual Fund

investment by selling the units to the fund itself and receive his money within 3

working days.

TRANSPARENCY

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The investor gets regular information on the value of his investment in addition to

disclosure on the specific investments made by the fund, the proportion invested in

each class of assets and the fund manager’s investment strategy and outlook.

SAVING TAXES

Tax saving schemes of Mutual Funds offer investor a tax rebate under section 88 of

the Income Tax Act. Under this section, an investor can invest up to Rs.10,000 per

Financial year in a tax saving scheme. The rate of rebate under this section depends

on the investor’s total income.

INVESTING IN STOCK MARKET INDEX

Index schemes of mutual funds give you the opportunity of investing in scrips that

make up a particular index in the same proportion of weightage that these scrips

have in the index. Thus, the return on your investment mirrors the movement of the

index.

INVESTING IN GOVERNMENT SECURITIES

Gilt and Money Market Schemes of Mutual Funds also give you the opportunity to

invest in Government Securities and Money Markets (including the inter banking

call money market)

WELL-REGULATED INDUSTRY

All Mutual Funds are registered with SEBI and they function within the provisions

of strict regulations designed to protect the interests of investors. The operations of

Mutual Funds are regularly monitored by SEBI.

CONVENIENCE AND FLEXIBILITY

Mutual Funds offer their investors a number of facilities such as inter-fund transfers,

online checking of holding status etc, which direct investments don’t offer.

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Mutual Fund Investment - Opportunities Opportunities of future expansion are very high.

Corporate governance of Mutual Funds is being given emphasis.

The Mutual funds in India has the scope of penetrating into the rural and semi

urban areas.

The Securities Exchange Board of India has allowed the introduction of

commodity mutual funds

A number of foreign based assets Management Company are venturing into Indian

markets.

DISADVANTAGES OF MUTUAL FUNDS

The following are some of the reasons which are deterrent to mutual fund investment:

Costs despite Negative Returns — Investors must pay sales charges, annual

fees, and other expenses regardless of how the fund performs. And, depending on

the timing of their investment, investors may also have to pay taxes on any capital

gains distribution they receive — even if the fund went on to perform poorly after

they bought shares.

 

Lack of Control — Investors typically cannot ascertain the exact make-up of a

fund's portfolio at any given time, nor can they directly influence which securities

the fund manager buys and sells or the timing of those trades.

No Guarantees- No investment is risk free. If the entire stock market declines in

value, the value of mutual fund shares will go down as well, no matter how

balanced the portfolio. Investors encounter fewer risks when they invest in mutual

funds than when they buy and sell stocks on their own. However, anyone who

invests through mutual fund runs the risk of losing the money.

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4.11 EVOLUTION AND GROWTH OF MUTUAL FUND

INDUSTRY

4.11.1 The Evolution

The formation of Unit Trust of India marked the evolution of the Indian mutual fund

industry in the year 1963. The primary objective at that time was to attract the small

investors and it was made possible through the collective efforts of the Government of

India and the Reserve Bank of India. The history of mutual fund industry in India can be

better understood divided into following phases:

Phase 1. Establishment and Growth of Unit Trust of India – 1964-87

Unit Trust of India enjoyed complete monopoly when it was established in the year 1963

by an act of Parliament. UTI was set up by the Reserve Bank of India and it continued to

operate under the regulatory control of the RBI until the two were de-linked in 1978 and

the entire control was mobilization in the hands of Industrial Development Bank of India

(IDBI). UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US-64),

which attracted the largest number of investors in any single investment scheme over the

years.

UTI launched more innovative schemes in 1970s and 80s to suit the needs of different

investors. It launched ULIP in 1971, six more schemes between 1981-84, Children’s Gift

Growth Fund and India Fund (India’s first offshore fund) in 1986, Mastershare (India’s

first equity

diversified scheme) in 1987 and Monthly Income Schemes (offering assured returns)

during 1990s. By the end of 1987, UTI’s assets under management grew ten times to Rs

6700 crores.

Phase II. Entry of Public Sector Funds – 1987-1993

The Indian mutual fund industry witnessed a number of public sector players entering the

market in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of

47

India became the first non-UTI mutual fund in India. SBI Mutual Fund was later

followed by Canbank Mutual Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of

India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. By 1993, the assets under

management of the industry increased seven times to Rs. 47,004 crores. However, UTI

remained to be the leader with about 80% market share.

1992-93Amount Mobilise

d

Assets Under

Management

Mobilisation as % of

gross Domestic Savings

UTI 11,057 38,247 5.2%

Public Sector

1,964 8,757 0.9%

Total 13,021 47,004 6.1%

(Table-4)

Phase III. Emergence of Private Secor Funds – 1993-96

The permission given to private sector funds including foreign fund management

Companies (most of them entering through joint ventures with Indian promoters) to enter

the mutual fund industry in 1993, provided a wide range of choice to investors and more

competition in the industry. Private funds introduced innovative products, investment

techniques and investor-servicing technology. By 1994-95, about 11 private sector funds

had launched their schemes.

Phase IV. Growth and SEBI Regulation – 1996-2004

The mutual fund industry witnessed robust growth and stricter regulation from the SEBI

after the year 1996. The Mobilization of funds and the number of players operating in the

industry reached new heights as investors started showing more interest in mutual funds.

Investors’ interests were safeguarded by SEBI and the Government offered tax benefits to

the investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was

introduced by SEBI that set uniform standards for all mutual funds in India. The Union

48

Budget in 1999 exempted all dividend incomes in the hands of investors from income tax.

Various Investor Awareness Programmes were launched during this phase, both by SEBI

and AMFI, with an objective to educate investors and make them informed about the

mutual fund industry.

In February 2003, the UTI Act was repealed and UTI was stripped of its Special legal

status as a trust formed by an Act of Parliament. The primary objective behind this was to

bring all mutal fund players on the same level. UTI was re-organised into two parts:

1. The Specified Undertaking, 2. The UTI Mutual Fund

Presently Unit Trust of India operates under the name of UTI Mutual Fund and its past

schemes (like US-64, Assured Return Schemes) are being gradually wound up. However,

UTI Mutual Fund is still the largest player in the industry. In 1999, there was a significant

growth in mobilization of funds from investors and assets under management which is

supported by the following data:

49

(Table-5)

ASSETS UNDER MANAGEMENT (RS. CRORES)

AS ON UTIPUBLIC

SECTOR

PRIVATE

SECTOR

TOTA

L

31-

March-

99

53,32

08,292 6,860

68,47

2

Phase V. Growth and Consolidation – 2004 Onwards

50

GROSS FUND MOBILISATION (RS. CRORES)

FROM TO UTIPUBLIC SECTOR

PRIVATE SECTOR

TOTAL

01-April-9831-

March-9911,679 1,732 7,966 21,377

01-April-9931-

March-0013,536 4,039 42,173 59,748

01-April-0031-

March-0112,413 6,192 74,352 92,957

01-April-0131-

March-024,643 13,613 1,46,267 1,64,523

01-April-02 31-Jan-03 5,505 22,923 2,20,551 2,48,979

01-Feb.-0331-

March-03* 7,259* 58,435 65,694

01-April-0331-

March-04- 68,558 5,21,632 5,90,190

01-April-0431-

March-05- 1,03,246 7,36,416 8,39,662

01-April-0531-

March-06- 1,83,446 9,14,712 10,98,158

The industry has also witnessed several mergers and acquisitions recently, examples of

which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C

Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more

international mutal fund players have entered India like Fidelity, Franklin Templeton

Mutual Fund etc. There were 29 funds as at the end of March 2006. This is a continuing

phase of growth of the industry through consolidation and entry of new international and

private sector players.

GROWTH IN ASSETS UNDER MANAGEMENT

(Chart-2)

Future Scenario

The asset base will continue to grow at an annual rate of about 30 to 35 % over the next

few years as investor’s shift their assets from banks and other traditional avenues. Some

of the older public and private sector players will either close shop or be taken over.

Out of ten public sector players five will sell out, close down or merge with stronger

players in three to four years. In the private sector this trend has already started with two

51

mergers and one takeover. Here too some of them will down their shutters in the near

future to come.

But this does not mean there is no room for other players. The market will witness a

flurry of new players entering the arena. There will be a large number of offers from

various asset management companies in the time to come. Some big names like Fidelity,

Principal, Old Mutual etc. are looking at Indian market seriously. One important reason

for it is that most major players already have presence here and hence these big names

would hardly like to get left behind.

The mutual fund industry is awaiting the introduction of derivatives in India as this would

enable it to hedge its risk and this in turn would be reflected in its Net Asset Value

(NAV).

SEBI is working out the norms for enabling the existing mutual fund schemes to trade in

derivatives. Importantly, many market players have called on the Regulator to initiate the

process immediately, so that the mutual funds can implement the changes that are

required to trade in Derivatives.

52

4.11.2 GROWTH OF MUTUAL FUND INDUSTRY IN INDIA

The Indian Mutual Fund has passed through three phases. The first phase was between

1964 and 1987 and the only player was the Unit Trust of India, which had a total asset of

Rs. 6,700 crores at the end of 1988. The second phase is between 1987 and 1993 during

which period 8 Funds were established (6 by banks and one each by LIC and GIC). The

total assets under management had grown to 61,028 crores at the end of 1994 and the

number of schemes was 167.

The third phase began with the entry of private and foreign sectors in the Mutual Fund

industry in 1993. Kothari Pioneer Mutual Fund was the first Fund to be established by the

private sector in association with a foreign Fund.

As at the end of financial year 2000(31st march) 32 Funds were functioning with

Rs. 1, 13,005 crores as total assets under management. As on august end 2000, there were

33 Funds with 391 schemes and assets under management with Rs 1, 02,849 crores.

The securities and Exchange Board of India (SEBI) came out with comprehensive

regulation in 1993 which defined the structure of Mutual Fund and Asset Management

Companies for the first time.

Several private sectors Mutual Funds were launched in 1993 and 1994. The share of the

private players has risen rapidly since then. Currently there are 34 Mutual Fund

organizations in India managing 1,02,000 crores. While the Indian mutual fund industry

has grown in size by about 320% from March, 1993 (Rs. 470 billion) to December, 2004

(Rs. 1505 billion) in terms of AUM, the AUM of the sector excluding UTI has grown

over 8 times from Rs. 152 billion in March 1999 to Rs. 1295 billion as at March 2005.

53

(Chart-3)

Though India is a minor player in the global mutual fund industry, its AUM as a

proportion of the global AUM has steadily increased and has doubled over its levels in

1999.

The growth rate of Indian mutual fund industry has been increasing for the last few years.

It was approximately 0.12% in the year of 1999 and it is noticed 0.25% in 2004 in terms

of AUM as percentage of global AUM.

(Chart-4)

54

The GDP of different countries

(Chart-5)

Now we can see from the above chart that India has robust GDP growth prospects.

4.12 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 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

55

continuing the activity in a major way. The experience of some of the AMCs floated by

private sector Indian companies was also very similar. 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.

The foreign owned companies have deep pockets and have come in here with the

expectation of a long haul. 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.

Some facts for the growth of mutual funds in India

100% growth in the last 6 years.

Number of foreign AMC’s is in the queue to enter the Indian markets like Fidelity

Investments, US based, with over US$1trillion assets under management

worldwide.

Our saving rate is over 23%, highest in the world. Only channelizing these

savings in mutual funds sector is required.

We have approximately 29 mutual funds which are much less than US having

more than 800. There is a big scope for expansion.

‘B’ and ‘C’ class cities are growing rapidly. Today most of the mutual funds are

concentrating on the ‘A’ class cities. Soon they will find scope in the growing

cities.

Mutual fund can penetrate rurals like the Indian insurance industry with simple

and limited products.

SEBI allowing the MF’s to launch commodity mutual funds.

Emphasis on better corporate governance.

Trying to curb the late trading practices.

Introduction of Financial Planners who can provide need based advice.

56

4.13 RISK FACTORS OF MUTUAL FUNDS

The Risk-Return Trade-off:

The most important relationship to understand is the risk-return trade-off. Higher the risk

greater 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.

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. An ‘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: Things you hear people talk about: “Rs. 100 today is worth more than

Rs. 100 tomorrow.” “Remember the time when a bus ride cost 50 paise?” “Mehangai Ka

Jamana Hai.”

The root cause, 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

57

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.

Risk Hierarchy of Different Mutual Funds

Thus, different mutual fund schemes are exposed to different levels of risk and investors

should know the level of risks associated with these schemes before investing. The

58

graphical representation hereunder provides a clearer picture of the relationship between

mutual funds and levels of risk associated with these funds:

(Chart-6)

Snapshot of Mutual Fund Schemes

59

Mutual Fund Type

Objective RiskInvestment

PortfolioWho should

investInvestment horizon

Money Market

Liquidity + Moderate Income +

Reservation of Capital

Negligible

Treasury Bills, Certificate of

Deposits, Commercial Papers, Call

Money

Those who park their funds in

current accounts or short-term bank

deposits

2 days - 3 weeks

Short-term Funds

(Floating - short-term)

Liquidity + Moderate Income

Little Interest Rate

Call Money, Commercial

Papers, Treasury Bills,

CDs, Short-term

Government securities.

Those with surplus

short-term funds

3 weeks - 3 months

Bond Funds

(Floating - Long-term)

Regular IncomeCredit Risk & Interest Rate Risk

Predominantly Debentures, Government securities, Corporate

Bonds

Salaried & conservative

investorsMore than 9 - 12 months

Gilt FundsSecurity &

IncomeInterest Rate

RiskGovernment

securities

Salaried & conservative

investors12 months & more

Equity Funds

Long-term Capital

AppreciationHigh Risk Stocks

Aggressive investors with long term out

look.

3 years plus

Index Funds

To generate returns that are commensurate with returns of

respective indices

NAV varies with index

performance

Portfolio indices like

BSE, NIFTY etc

Aggressive investors.

3 years plus

Balanced Funds

Growth & Regular Income

Capital Market Risk and Interest Rate Risk

Balanced ratio of equity and debt funds to ensure higher

returns at lower risk

Moderate & Aggressive

2 years plus

(Table-6)

Chapter – 5

Methodology and Procedure of Work

60

5.1 RESEARCH DESIGN & DATA COLLECTION

The Methodology involves randomly selecting Open-Ended equity schemes of different

fund houses of the country. The research is on the COMPARATIVES STUDY

BETWEEN MUTUAL FUNDS OFFER BY VARIOUS COMPANIES IN INDIAN

MARKET. This research is secondary database oriented. Hence the research design

used is empirical research.

The data has been collected from various secondary sources like websites, various

reviews, and journals.

5.2 COMPANY FOCUS

For the study, searched many companies and finally focused some companies such that

Kotak Mahindra Mutual Fund, Reliance Mutual Fund, HDFC Mutual Fund,

Franklin Templeton Mutual Fund, HSBC Mutual Fund etc. each scheme is

analyzed according to its performance against the other, based on factors like Sharpe’s

Ratio, Treynor’s Ratio, (Beta) Co-efficient, Returns.

The comparison between these schemes is made based on the following factors

A) Sharpe’s Ratio

B) Treynor’s Ratio

C) (Beta) co-efficient.

D) Returns

A) The Sharpe’s Measure :-

In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is

a ratio of returns generated by the fund over and above risk free rate of return and the

total risk associated with it.

According to Sharpe, it is the total risk of the fund that the investors are concerned

about. So, the model evaluates funds on the basis of reward per unit of total risk.

Symbolically, it can be written as:

61

Sharpe Index (Si) = (Ri - Rf)/Si

Where,

Si is Standard Deviation of the fund.

While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a

fund, a low and negative Sharpe Ratio is an indication of unfavorable performance.

B) The Treynor Measure :-

Developed by Jack Treynor, this performance measure evaluates funds on the basis of

Treynor's Index.

This Index is a ratio of return generated by the fund over and above risk free rate of

return (generally taken to be the return on securities backed by the government, as there

is no credit risk associated), during a given period and systematic risk associated with it

(beta). Symbolically, it can be represented as:

Treynor's Index (Ti) = (Ri - Rf)/Bi.

Where,

Ri represents return on fund,

Rf is risk free rate of return,

and Bi is beta of the fund.

All risk-averse investors would like to maximize this value. While a high and positive

Treynor's Index shows a superior risk-adjusted performance of a fund, a low and

negative Treynor's Index is an indication of unfavorable performance.

C) (Beta) Co-efficient:-

Systematic risk is measured in terms of Beta, which represents fluctuations in the NAV

of the fund vis-à-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

62

using the risk return relationship, we try to assess the competitive strength of the

Mutual Funds vis-à-vis one another in a better way.

(Beta) is calculated as N ( XY) – X Y

N (X2) – (X) 2

D) Returns:- Returns for the last one-year of different schemes are taken for the

comparison and analysis part.

5.3 Types of Research

5.3.1 Descriptive Research

This research is the most commonly used and the basic reason for carrying out

descriptive research is to identify the cause of something that is happening.

5.3.2 Exploratory Research

This genre of research simply allows the marketer to gain a greater understanding of

something that he doesn’t know enough about.

5.4 HYPOTHESIS

The Hypothesis of the study involves Comparison between:

1. Kotak Opportunities fund.

2. Reliance Equity Opportunities fund.

3. Franklin India Flexi fund.

4. HDFC Core & satellite fund.

5. HSBC India Opportunities fund.

Chapter – 6

Analysis of Data

63

Note: All the data used for analysis is taken up to the period 28-febuary-2009

PERFORMANCE MEASURES OF MUTUAL FUNDS:

Mutual Fund industry today, with about 30 players and more than six 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 AMC’s and this

fame is directly linked to their superior stock selection skills.

For Mutual Funds to grow, AMC’s 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 AMC’s.

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 securities present 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.

64

Systematic risk, on the other hand, is measured in terms of Beta, which represents

fluctuations in the NAV of the fund vis-à-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 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 Model

1) The Treynor Measure:-

Developed by Jack Treynor, this performance measure evaluates funds on the basis of

Treynor's Index.

This Index is a ratio of return generated by the fund over and above risk free rate of

return (generally taken to be the return on securities backed by the government, as there

is no credit risk associated), during a given period and systematic risk associated with it

(beta). Symbolically, it can be represented as:

Treynor's Index (Ti) = (Ri - Rf)/Bi.

Where,

Ri represents return on fund,

Rf is risk free rate of return, and

Bi is beta of the fund.

65

All risk-averse investors would like to maximize this value. While a high and positive

Treynor's Index shows a superior risk-adjusted performance of a fund, a low and

negative Treynor's Index is an indication of unfavorable performance.

2) The Sharpe Measure :-

In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is

a ratio of returns generated by the fund over and above risk free rate of return and the

total risk associated with it.

According to Sharpe, it is the total risk of the fund that the investors are concerned

about. So, the model evaluates funds on the basis of reward per unit of total risk.

Symbolically, it can be written as:

Sharpe Index (Si) = (Ri - Rf)/Si

Where,

Si is standard deviation of the fund,

Ri represents return on fund, and

Rf is risk free rate of return.

While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a

fund, a low and negative Sharpe Ratio is an indication of unfavorable performance.

Comparison of Sharpe and Treynor

Sharpe and Treynor measures are similar in a way, since they both divide the risk

premium by a numerical risk measure. The total risk is appropriate when we are

evaluating the risk return relationship for well-diversified portfolios. On the other hand,

the systematic risk is the relevant measure of risk when we are evaluating less than

fully diversified portfolios or individual stocks. For a well-diversified portfolio the total

risk is equal to systematic risk. Rankings based on total risk (Sharpe measure) and

systematic risk (Treynor measure) should be identical for a well-diversified portfolio,

66

as the total risk is reduced to systematic risk. Therefore, a poorly diversified fund that

ranks higher on Treynor measure, compared with another fund that is highly

diversified, will rank lower on Sharpe Measure.

3) Jenson Model:-

Jenson's model proposes another risk adjusted performance measure. This measure was

developed by Michael Jenson and is sometimes referred to as the differential Return

Method. This measure involves evaluation of the returns that the fund has generated vs.

the returns actually expected out of the fund1 given the level of its systematic risk. The

surplus between the two returns is called Alpha, which measures the performance of a

fund compared with the actual returns over the period. Required return of a fund at a

given level of risk (Bi) can be calculated as:

Ri = Rf + Bi (Rm - Rf)

Where,

Ri represents return on fund, and

Rm is average market return during the given period,

Rf is risk free rate of return, and

Bi is Beta deviation of the fund.

After calculating it, Alpha can be obtained by subtracting required return from

the actual return of the fund.

Higher alpha represents superior performance of the fund and vice versa. Limitation of

this model is that it considers only systematic risk not the entire risk associated with the

fund and an ordinary investor cannot mitigate unsystematic risk, as his knowledge of

market is primitive.

4) Fama Model:-

The Eugene Fama model is an extension of Jenson model. This model compares the

performance, measured in terms of returns, of a fund with the required return

67

commensurate with the total risk associated with it. The difference between these two is

taken as a measure of the performance of the fund and is called Net Selectivity.

The Net Selectivity represents the stock selection skill of the fund manager, as it is the

excess returns over and above the return required to compensate for the total risk taken

by the fund manager. Higher value of which indicates that fund manager has earned

returns well above the return commensurate with the level of risk taken by him.

Required return can be calculated as: Ri = Rf + Si/Sm*(Rm - Rf)

Where,

Ri represents return on fund,

Sm is standard deviation of market returns,

Rm is average market return during the given period, and

Rf is risk free rate of return.

The Net Selectivity is then calculated by subtracting this required return from

the actual return of the fund.

Among the above performance measures, two models namely, Treynor measure and

Jenson model use Systematic risk is based on the premise that the Unsystematic risk is

diversifiable. These models are suitable for large investors like institutional investors

with high risk taking capacities as they do not face paucity of funds and can invest in a

number of options to dilute some risks. For them, a portfolio can be spread across a

number of stocks and sectors. However, Sharpe measure and Fama model that consider

the entire risk associated with fund are suitable for small investors, as the ordinary

investor lacks the necessary skill and resources to diversify. Moreover, the selection of

the fund on the basis of superior stock selection ability of the fund manager will also

help in safeguarding the money invested to a great extent. The investment in funds that

have generated big returns at higher levels of risks leaves the money all the more prone

to risks of all kinds that may exceed the individual investors' risk appetite.

68

KOTAK OPPORTUNITIES FUND

Kotak opportunities is a open-ended equity Growth scheme.

Kotak opportunities is a diversified aggressive equity scheme

The fund has portfolio turnover ratio.

The fund manager is optimistic on the markets in the long term and expects good

returns from the same.

The fund manager is of the opinion that the market may not fall due to the abundent

liquidity in the system.However the fund managers sees high oil prices a big concern

in the global markets.

The fund has invested into equities to the tune of 94.45% of the total portfolio.

RELIANCE EQUITY OPPORTUNITIES FUND:

Reliance Equity Opportunities Fund is an Open-Ended Equity Scheme.

Reliance Equity Opportunities Fund is an aggressive diversified equity scheme

Reliance Equity Opportunities is to seek to generate capital appreciation and provide

long term growth opportunities by investing in a portfolio constituted of equity

securities and equity related securities.

The fund has a high portfolio turnover ratio.

It has Instrument type such as Equity & Equity related Instruments and Debt &

Money Market Instruments.

HDFC Core and Satellite Fund

HDFC Core and Satellite Fund is an Open-Ended Equity Scheme.

HDFC Core and Satellite Fund is an diversified equity scheme

The Scheme may seek investment opportunity in the ADR / GDR / Foreign Equity

and Debt Securities, in accordance with guidelines stipulated in this regard by SEBI

and RBI from time to time.

69

The net assets of the Scheme will be invested primarily in equity and equity related

instruments in a portfolio comprising of 'Core' group of companies and 'Satellite'

group of companies.

The 'Satellite' group will comprise of predominantly small-mid cap companies that

offer higher potential returns but at the same time carry higher risk

FRANKLIN INDIA FLEXI CAP EQUITY FUND

Franklin india flexi cap Fund is an Open-Ended Equity Scheme.

Franklin india flexi cap Fund is an aggressive diversified equity scheme

It is an investment avenue that has the potential to provide steady returns and capital

appreciation over a five-year period through a mix of fixed income and equity

instruments.

It has a investment team has a rich experience of investing in both equity and fixed

income instrument that has translated in to a good investment performance from its

hybrid scheme

HSBC India opportunities Fund

HSBC India Opportunities Fund is an Open-Ended Equity Scheme.

It is a scheme seeking long term capital growth through investments across all

market capitalizations, including small, mid and large cap stocks.

The investment is to seek aggressive growth by focussing on mid cap companies in

addition to investments in large cap stocks.

The fund aims to be predominantly invested in equity and equity related securities

KOTAK OPPORTUNITIES FUND

Fund Manager: (Mr. Anand Shah)

70

OBJECTIVE:-

To generate capital appreciation from a diversified portfolio of equity and equity

related securities Kotak Opportunities is a diversified equity scheme, with a flexible

investing style. It will invest in sectors, which our Fund Manager believes would

outperform others in the short to medium-term. Kotak Opportunities’ specialty lies in

giving the Fund Manager flexibility to act based on his views on the market; and in

allowing him to invest higher concentrations in sectors he believes will outperform

others.

As markets evolve and grow, new opportunities for growth keep emerging. Kotak

Opportunities would endeavor to capture these opportunities to generate wealth for its

investors.

KOTAK OPPORTUNITIES FUND PERFORMANCE:-

YEAR Rp Rm Rf(Rm-Rf)

(Rp-Rf) X2 XY

(X -Xbar) D2

X Y D  

LAST 1 MONTH 5.92 2.84 4.25 -1.41 1.67 1.98 -2.35 -20.11 404.71

LAST 3 MONTHS 24.61 13.11 4.25 8.86 20.36 78.49 180.38 -9.847 96.97

LAST 6 MONTHS 34.42 30.14 4.25 25.89 30.17 670.29 781.10 25.89 670.29

Since Inception 78.17 45.99 4.5 41.49 73.67 1721.42 3056.56 22.78 519.04

TOTAL       74.83 125.87 2472.19 4015.70 18.70 1691.02(Table-7)

Where,

Rp - Portfolio Return- Kotak opportunities

Rm - Market Return-Fund’s bench mark- S& P CNX 500

Rf - Risk free rate of return.

CALCULATION OF ARTHMETIC MEAN :-

= X / N

71

= 74.83/ 4

= 18.70

CALCULATION OF STANDARD DEVIATION (σ ) :-

= √ (X-Xbar) 2 / N

= √1691.02/4

=√422.75

=20.56

CALCULATION OF BETA CO-EFFICIENT:-

= N ( XY) – X Y

N (X2) – (X) 2

= 4(5208.85) – (90.35)(126.21)

4(4117.22) – (90.35) 2

= 4(4015.70)-(74.83)-(125.87)

4(2472.19)-(74.83) 2

= 16062.8-9418.85

9888.76-5599

= 6643.95

4289.76

=1.54

CALCULATION OF SHARPE’S RATIO:-

= Rp-Rf / s

=125.87 /20.56

= 6.12

CALCULATION OF TREYNOR’S RATIO :-

= Rp-Rf /

= 125.87/1.54

= 87.73/100

=0.8173

CHART-7 SHOWING KOTAK OPPORTUNITIES FUND PERFORMANCE:-

72

Interpretation:-

Last I Month : It reveals that Kotak Opportunities Returns are 5.92

As compare to Funds Benchmark Returns are 2.84, and

The Risk Free Rate is common for next 9 months. (i.e., 4.25%)

Last III Months : It reveals that Kotak Opportunities Returns are 24.61

As compare to Funds Benchmark Returns are 13.11, and

The Risk Free Rate is common for next 6 months. (i.e., 4.25%)

Last VI Months : It reveals that Kotak Opportunities Returns are 34.42

As compare to Funds Benchmark Returns are 30.14, and

The Risk Free Rate is common for next 3 months. (i.e., 4.25%)

Since Inception : It reveals that Kotak Opportunities Returns are 78.17,

As compare to Funds Benchmark Returns are 45.99, and

There is a slight Increase in Risk Free Rate by 0.25% (i.e., 4.5%)

compare to last 9 Months.

HDFC CORE& SATELLITE FUND :

73

KOTAK OPPORTUNITIES

5.92

24.61

34.42

78.17

2.84

13.11

30.14

45.99

4.25 4.25 4.25 4.5

LAST 1 MONTH LAST 3 MONTHS LAST 6 MONTHS SINCE INCEPTION 09SEPTEMBER-2008

RE

TU

RN

S

KOTAK OPPORTUNITIESS& P CNX-500Rf

Objective :-

The objective of the scheme is to generate capital appreciation through equity

investment in companies whose shares are quoting at prices below their true value.

HDFC CORE& SATELLITE FUND PERFORMANCE:-

YEAR Rp Rm Rf(Rm-Rf)

(Rp-Rf) X2 XY

(X -Xbar) D2

        X Y     D  LAST 1MONTH 1.15 3.72 4.25 -0.53 -3.1 0.2809 1.643

-20.7925 432.3280563

LAST 3 MONTHS 16.46 13.82 4.25 9.57 12.21 91.5849 116.8497

-10.6925 114.3295563

LAST 6MONTHS 35.6 31.1 4.25 26.85 31.35 720.9225 841.7475 26.85 720.9225Since Inception 69.64 49.66 4.5 45.16 65.14 2039.4256 2941.7224 24.8975 619.8855063

TOTAL       81.05 105.6 2852.2139 3901.9626 20.2625 1887.465619

(Table-8)

Where,

Rp - Portfolio Return-HDFC core & Satellite Fund

Rm - Market Return-Fund’s benchmark-BSE-200

Rf - Risk free rate of return.

CALCULATION OF ARTHMETIC MEAN:-

= X / N

= 81.05/4

= 20.26

CALCULATION OF STANDARD DEVIATION (σ) :-

= √ (X-Xbar)2 / N

= √1887.4/4

= √471.75

=21.71

CALCULATION OF BETA CO-EFFICIENT:-

74

= N ( XY) – X Y

N (X2) – (X) 2

= 4(3901.9) –(81.05)(105.6)

4(4026) – (89.75) 2

= 15607.5-8558.8

11408.8-6569.1

=7048.7

4839

=1.45

CALCULATION OF SHARPE’S RATIO:-

=Rp-Rf-/ σ

=105.6/21.71

=4.86

CALCULATION OF TREYNOR’S RATIO :-

= Rp-Rf/

= 105.6/1.45

= 72.82/100

=0.7282

CHART-8 SHOWING HDFC CORE& SATELLITE FUND PERFORMANCE

75

Interpretation:

Last I Month : It reveals that HDFC Core & Satellite Fund Returns are

1.15

as compare to Funds Benchmark Returns are 3.72, and The Risk

Free Rate is common for next 9 months. (i.e., 4.25%)

Last III Months : It reveals that HDFC Core & Satellite Fund Returns are 16.46

as compare to Funds Benchmark Returns are 13.82, and The

Risk Free Rate is common for next 6 months. (i.e., 4.25%)

Last VI Months : It reveals that HDFC Core & Satellite Fund Returns are 35.6,

as compare to Funds Benchmark Returns are 31.1 and The Risk

Free Rate is common for next 3 months. (i.e., 4.25%)

Since Inception : It reveals that HDFC Core & Satellite Fund Returns are 69.64,

as compare to Funds Benchmark Returns are 49.66, and There is

a slight increase in Risk Free Rate by 0.25%(4.5%) compare to

last 9 Months.

76

HDFC Core & Satellite Fund Performance

1.15

16.46

35.6

69.64

3.72

13.82

31.1

49.66

4.25 4.25 4.25 4.5

0

10

20

30

40

50

60

70

80

LAST 1 MONTH LAST 3 MONTHS LAST 6 MONTHS SINCE INCEPTION 17 SEPTEMBER-2008

RE

TU

RN

S

Rp Rm RETURNSRf

RELIANCE EQUITY OPPORTUNITIES FUND:

Investment Objective:

The primary investment objective of the scheme is to seek to generate capital

appreciation & provide long-term growth opportunities by investing in a portfolio

constituted of equity securities & equity related securities and the secondary

objective is to generate consistent returns by investing in debt and money market

securities.

RELIANCE EQUITY OPPORTUNITIES FUND PERFORMANCE:-

YEAR Rp Rm Rf(Rm-Rf)

(Rp-Rf) X2 XY

(X -Xbar) D2

        X Y     D  

LAST 1 MONTH 2.4 3.72 4.25 -0.53 -1.85 0.2809 0.9805 -20.935 438.274225

LAST 3 MONTHS 16.22 13.82 4.25 9.57 11.97 91.5849 114.5529 9.57 91.5849

LAST 6 MONTHS 29.46 31.1 4.25 26.85 25.21 720.9225 676.8885 6.445 41.538025

Since Inception 54.99 50.23 4.5 45.73 50.49 2091.2329 2308.9077 45.73 2091.2329

TOTAL       81.62 85.82 2904.0212 3101.3296 40.81 2662.63005

(Table-9)

Where,

Rp - Portfolio Return-Reliance equity opportunities fund

Rm - Market Return-Fund’s Benchmark BSE-500

Rf - Risk free rate of return.

77

CALCULATION OF ARTHMETIC MEAN:-

= X / N

= 81.62/ 4

= 20.40

CALCULATION OF STANDARD DEVIATION (σ) :-

= √ (X-Xbar)2 / N

= √2662.63/4

= √665.65

=25.80

CALCULATION OF BETA CO-EFFICIENT;-

= N ( XY) – X Y

N (X2) – (X) 2

= 4(3101.32) – (81.62)(85.82)

4(2904.02) – (81.62) 2

= 12405-7002.91

11616-6661.82

=5402.09

4954.18

=1.09

CALCULATION OF SHARPE’S RATIO:-

= Rp-Rf/ σ

=85.82

25.23

=7.29

CALCULATION OF TREYNOR’S RATIO :-

= Rp-Rf/

= 85.82/1.47

= 37.32/100

=0.37

78

CHART-9 SHOWING RELIANCE EQUITY OPPORTUNITIES FUND

PERFORMANCE

Interpretation:-

Last I Month : It reveals that Reliance Equity Opportunities Fund Returns are

2.4 as compare to Funds Benchmark Returns Are 3.72, and The

Risk Free Rate is common for next 9 months. (i.e., 4.25%)

Last III Months : It reveals that Reliance Equity Opportunities

Fund Returns are 16.22 as compare to Funds Benchmark Returns

are 13.82, and The Risk Free Rate is common for next 6 months.

(i.e., 4.25%)

Last VI Months : It reveals that Reliance Equity Opportunities

Fund Returns are 29.46 as compare to Funds Benchmark Returns

are 31.1 and The Risk Free Rate is common for next 3 months.

(i.e., 4.25%)

Since Inception : It reveals that Reliance Equity Opportunities Fund Returns

are 54.99, as compare to Funds Benchmark returns are 50.23, and

79

RELIANCE EQUITY OPPORTUNITIES FUND

2.4

16.22

29.46

54.99

3.72

13.82

31.1

50.23

4.25 4.25 4.25 4.5

LAST 1MONTH LAST 3 MONTHS LAST 6 MONTHS SINCE INCEPTION 31 MARCH2008

RE

TU

RN

SR

f

RELIANCEBSE-100

There is a slight increase in Risk Free Rate by 0.25%(4.5%)

compare to last 9 months.

FRANKLIN INDIA FLEXI CAP EQUITY FUND

Fund Managers: (Mr. K N Siva Subramanian & R Sukumar Rajah)

Investment objective:

Stocks of companies are usually categorized as large-cap, midcap, and small-cap

depending on their market capitalization. History has demonstrated that these categories

tend to perform differently through economic and market cycles. For example, mid or

small cap stocks could move up sharply during a certain time period while large cap

stocks remain range bound and vice versa. On the other hand, large-cap stocks tend to be

less volatile than mid & small-cap stocks on account of factors such as size, market

leadership..etc. Moreover, such periods of out performance are typically followed by a

consolidation phase and a possible reversal of the situation. In order to derive optimal

returns from the stock markets, investments need to be diversified and have flexibility to

shift allocations across market caps.

Designed to help you achieve this with a single investment is Franklin India Flexi Cap

Fund (FIFCF). An open-end diversified equity fund, FIFCF seeks to provide medium to

long-term capital appreciation by investing in stocks across the entire market

capitalization range.

80

FRANKLIN INDIA FLEXI CAP FUND PEFORMANCE:-

YEAR Rp Rm Rf(Rm-Rf)

(Rp-Rf)

X2 XY(X -Xbar)

D2

X Y D

LAST 1MONTH 3.47 3.72 4.25 -0.53-0.78

0.281 0.4134-20.935

438.274225

LAST 3 MONTHS 16.49 13.82 4.25 9.57 12.2 91.58 117.1368 10.1 102.01

LAST 6 MONTHS 36.58 31.1 4.25 26.9 32.3 720.9 868.0605 17.28 298.5984

SINCE INCEPTION March 2, 2005

61.8 50.23 4.5 45.7 57.3 2091 2620.329 18.88 356.4544

TOTAL 81.6 101 2904 3605.9397 25.325 1195.337025

(Table-10)

Where,

Rp - Portfolio Return-Franklin flexi cap fund

Rm - Market Return-Fund’s Benchmarks S&P CNX-500

Rf - Risk free rate of return.

CALCULATION OF ARTHMETIC MEAN:-

= X / N

= 81.6/ 4

= 20.4

CALCULATION OF STANDARD DEVIATION (σ) :-

= √ (X-Xbar)2 / N

= √1195/4

= √298.75

= 17.28

81

CALCULATION OF BETA CO-EFFICIENT;-

= N ( XY) – X Y

N (X2) – (X) 2

= 4(3605) – (81.6)(101)

4(2904) – (2904) 2

= 14420-8241.6

11616-8433

=6178.4

3183

=1.94

CALCULATION OF SHARPE’S RATIO:-

= Rp-Rf/ σ

=101

17.28

=5.84

CALCULATION OF TREYNOR’S RATIO :-

= Rp-Rf/

=101/1.94

= 52.06/100 or 0.52

82

CHART-10 SHOWING FRANKLIN INDIA FLEXI CAP FUND PERFORMANCE:-

Interpretation:

Last I Month : It reveals that Franklin India flexi Cap Fund Returns are 3.47 as

compare to Funds Benchmark Returns are 2.8, and The Risk Free

Rate is common for next 9 months. (i.e., 4.25%)

Last III Months : It reveals that Franklin India flexi Cap Fund Returns are

14.49 as compare to Funds Benchmark Returns are 13.11, and

The Risk Free Rate is common for next 6 months. (i.e., 4.25%)

Last VI Months : It reveals that Birla Sun-life Equity Opportunities Fund

Returns are 36.58 as compare to Funds Benchmark Returns are

30.14 And the Risk Free Rate is common for next 3 months. (i.e.,

4.25%)

83

Franklin india flexi cap fund

3.47

16.49

36.58

61.8

3.72

13.82

31.1

50.23

4.25 4.25 4.25 4.5

0

10

20

30

40

50

60

70

LAST 1MONTH LAST 3 MONTHS LAST 6 MONTHS SINCE INCEPTION March 2, 2008

RE

TU

RN

S

Rp Rm Rf

Since Inception : It reveals that Birla Sun-life Equity Opportunities Fund

Returns are 61.8, as compare to Funds Benchmark Returns are

47.75 and There is a slight Increase in Risk Free Rate by

0.25%(4.5%) compare to last 9 months.

HSBC INDIA OPPORTUNITIES FUND

Fund Manager: (Mr.Sanjiv Duggal)

Investment objective:

The fund is an open-ended equity scheme seeking long term capital growth through

investments across all market capitalizations, including small, mid and large cap

stocks. The fund will endeavor to invest in large cap companies as well as identify

mid stocks, which have the potential to become blue chip large cap stocks over

time. The investment style is to seek aggressive growth by focusing on mid cap

companies in addition to investments in large cap stocks. This fund aims to be

predominantly invested in equity and equity related securities. However, it could

move a significant portion of its assets towards fixed income securities if the fund

becomes negative on negative on equity markets.

HSBC INDIA OPPORTUNITIES FUND PEFORMANCE:-

YEAR Rp Rm Rf(Rm-Rf)

(Rp-Rf) X2 XY

(X -Xbar) D2

X Y DLAST 1 MONTH -0.57 2.81 4.25 -1.44 -4.82 2.0736 6.9408 -19.695 387.893025LAST 3 MONTHS 12.45 13.45 4.25 9.2 8.2 84.64 75.44 9.15 83.7225LAST 6 MONTHS 27.67 28.13 4.25 23.88 23.42 570.2544 559.2696 13.67 186.8689Since Inception 48.62 45.88 4.5 41.38 44.12 1712.3044 1825.6856 11.58 134.0964

TOTAL       73.02 70.92 2369.2724 2467.336 14.705 792.580825

(Table-11)

Where,

Rp - Portfolio Return-

84

Rm - Market Return,

Rf - Risk free rate of return.

CALCULATION OF ARTHMETIC MEAN:-

= X / N

= 73.02/ 4

= 18.25

CALCULATION OF STANDARD DEVIATION (σ) :-

= √ (X-Xbar)2 / N

= √792.58/4

= √198.14

=14.07

CALCULATION OF BETA CO-EFFICIENT;-

= N ( XY) – X Y

N (X2) – (X) 2

= 4(2467.33) – (73.02)(70.92)

4(2369.27) – (73.02) 2

= 9869.32-5178.57

9477.08-5331.92

=4690.75

4145.18

=1.13

CALCULATION OF SHARPE’S RATIO:-

= Rp-Rf/ σ

=70.92

14.07

=5.04

CALCULATION OF TREYNOR’S RATIO : -

= Rp-Rf/

85

=70.92/1.13

= 62.76/100

=0.62

CHART-11 SHOWING HSBC INDIA OPPORTUNITIES FUND

PEFORMANCE:-

HSBC INDIA OPPORTUNITIES

-0.57

12.45

27.67

48.62

2.81

13.45

28.13

45.88

4.25 4.25 4.25 4.5

-10

0

10

20

30

40

50

60

1/1/1900 1/2/1900 1/3/1900 1/4/1900 1/5/1900 1/6/1900

RETU

RNS

HSBC BSE-500 Rf

Interpretation

Last I Month : It reveals that HSBC India Opportunities Fund Returns are -0.57

as compare to Funds Benchmark Returns are 2.81, and The Risk

Free Rate is common for next 9 months. (i.e., 4.25%).

Last III Months : It reveals that HSBC India Opportunities Fund Returns are

12.45 as compare to Funds Benchmark Returns are 13.45, and

The Risk Free Rate is common for next 6 months. (i.e., 4.25%).

Last VI Months : It reveals that that HSBC India Opportunities Fund Returns

are 27.87 as compare to Funds Benchmark Returns are 28.13

and The Risk Free Rate is common for next 3 months. (i.e.,

4.25%)

Since Inception : It reveals that HSBC India Opportunities Fund Returns

are 48.82, as compare to Funds Benchmark returns are 45.82, and

86

There is a slight Increase in Risk Free Rate by 0.25 % (4.5%)

compare to last 9 months

OBSERVATIONS;

Observations are made from the data analysis.

The following observations are drawn from the analysis of schemes:

KOTAK

OPPORTUNITIES

FUND

FRANKLIN

INDIA

FLEXI

CAP FUND

RELIANCE

EQUITY

OPPORTUNITIE

S

FUND

HDFC

CORE &

SATELLITE

FUND

HSBC

INDIA

OPPORT-

UNITIES

FUND

Monthly return’s5.92 3.47 2.4 1.15 -0.57

Sharpe’s Ratio 6.12 5.84 7.29 4.86 5.04

Treynor’s Ratio 0.81 0.52 0.37 0.72 0.62

Co-efficient () 1.54 1.94 1.09 1.45 1.13

Std.Deviation (s) 20.56 17.28 25.80 21.71 14.07

(Table-12)

87

Chapter – 7

Conclusion and Recommendation

CONCLUSIONS

After interpreting the above data the following conclusions have been made

Kotak Opportunities Fund:

It is a diversified aggressive equity fund.

It is a open-ended equity scheme

Since the ratio is high it implies the risk is high

As the returns are more in Kotak Opportunities compare to other Four AMC’s

It is suitable for investors looking for medium risk and moderate returns with in a

time period of 1-3 years.

Franklin India Flexi Cap Fund:

It is a diversified equity fund.

It is a open-ended equity scheme

Since the ratio is high it implies the risk is high

In Franklin the returns are more compare to other Three AMC’s (HDFC,

RELIANCE, HSBC)

Reliance Equity Opportunities Growth Fund:

It is a diversified equity fund.

It is a open-ended equity scheme

Since the ratio is high it implies the risk is high

In Reliance Equity Opportunities the returns are medium compare to other AMC’s

88

HDFC Core & Satellite Fund:

It is a diversified equity fund.

It is a open-ended equity scheme

In HDFC the returns are low compare to other AMC’s

It is a value based fund

It is a low risky fund

HSBC India Opportunities Fund:-

It is a diversified equity fund.

It is a open-ended equity scheme

In HSBC the returns are lesser than other AMC’s

It is a low risky fund

SUGGESTIONS:-

The Asset Management Company must design the portfolio in such a way, to

increase the returns.

The Asset Management Company must design the portfolio in such a way, to

lessen the risk that is common in the market.

The Asset Management Company must dedicate itself, because it motivates the

investors and potential investors to invest in Mutual Funds.

The Asset Management Company must manage the Fund efficiently and with

dedication to earn the goodwill of the public.

The Asset Management Company must make the most advantageous use of

print and electronic media in order to motivate the investors and potential investors

to invest in Mutual Funds.

89

Chapter – 8

SUMMARY

The project’s idea is to project Mutual Fund as a better avenue for investment on a

long-term or short-term basis. Mutual Fund is a productive package for a lay-investor

with limited finances, this project creates an awareness that the Mutual Fund is a

worthy investment practice. Mutual Fund is a globally proven instrument. Mutual

Funds are ”Unit Trust” as it is called in some parts of the world has a long and

successful history, of late Mutual Funds have become a hot favorite of millions of

people all over the world.

The driving force of Mutual Funds is the ‘safety of the principal’ guaranteed, plus the

added advantage of capital appreciation together with the income earned in the form of

interest or dividend. The various schemes of Mutual Funds provide the investor with a

wide range of investment options according to his risk bearing capacities and interest

besides; they also give handy return to the investor. Mutual Funds offers an investor to

invest even a small amount of money, each Mutual Fund has a defined investment

objective and strategy. Mutual Funds schemes are managed by respective asset

managed companies sponsored by financial institutions, banks, private companies or

international firms. A Mutual Fund is the ideal investment vehicle for today’s complex

and modern financial scenario.

The study is basically made to analyze the various open-ended equity schemes of

different Asset Management Companies to highlight the diversity of investment that

Mutual Fund offer. Thus, through the study one would understand how a common man

could fruitfully convert a pittance into great penny by wisely investing into the right

scheme according to his risk taking abilities. The data is collected through websites,

90

various reviews, and journals. No primary data is involved; hence there is no sample

design. Further, mutual fund industry is discussed in detail, including evolution and

growth and future scenario of mutual fund industry.

91

Title of the Project:

COMPARATIVE STUDY BETWEEN MUTUAL FUNDS OFFER BY VARIOUS

COMPANIES IN INDIAN MARKET

Objective:

To project Mutual Fund as the ‘productive avenue’ for investing activities.

To show the wide range of investment options available in Mutual Funds by

explaining its various schemes.

To compare the schemes based on Sharpe’s ratio, Treynor’s ratio, Co-

efficient, Returns and show which scheme is best for the investor based on his

risk profile.

To help an investor make a right choice of investment, while considering the

inherent risk factors.

To understand the recent trends in Mutual Funds world.

Need for the Topic:

The project’s idea is to project Mutual Fund as a better avenue for investment on a

long-term or short-term basis. Mutual Fund is a productive package for a lay-investor

with limited finances, this project creates an awareness that the Mutual Fund is a

worthy investment practice. Mutual Fund is a globally proven instrument. Mutual

Funds are ”Unit Trust” as it is called in some parts of the world has a long and

successful history, of late Mutual Funds have become a hot favorite of millions of

people all over the world.

The driving force of Mutual Funds is the ‘safety of the principal’ guaranteed, plus the

added advantage of capital appreciation together with the income earned in the form of

92

interest or dividend. The various schemes of Mutual Funds provide the investor with a

wide range of investment options according to his risk bearing capacities and interest

besides; they also give handy return to the investor. Mutual Funds offers an investor to

invest even a small amount of money, each Mutual Fund has a defined investment

objective and strategy. Mutual Funds schemes are managed by respective asset

managed companies sponsored by financial institutions, banks, private companies or

international firms. A Mutual Fund is the ideal investment vehicle for today’s complex

and modern financial scenario.

The study is basically made to analyze the various open-ended equity schemes of

different Asset Management Companies to highlight the diversity of investment that

Mutual Fund offer. Thus, through the study one would understand how a common man

could fruitfully convert a pittance into great penny by wisely investing into the right

scheme according to his risk taking abilities.

Methodology and Procedure of Work:

The Methodology involves randomly selecting Open-Ended equity schemes of different

fund houses of the country. The research is on the COMPARATIVES STUDY

BETWEEN MUTUAL FUNDS OFFER BY VARIOUS COMPANIES IN INDIAN

MARKET. This research is secondary database oriented. Hence the research design

used is empirical research.

The data has been collected from various secondary sources like websites, various

reviews, and journals.

Statistical Technique to be used:

The scheme is analyzed according to its performance against the other, based on factors

like Sharpe’s Ratio, Treynor’s Ratio, (Beta) Co-efficient, Returns.

93

Chapterisation:

This dissertation consists of eight chapters, each chapter deals with different aspects of

this project.

The first chapter contains the introduction to the mutual fund industry in this dynamic

environment and the various schemes of mutual fund available for investment and

investor’s approach towards these schemes.

The second chapter deals with the way in which the study has been conducted. The

important topics of this chapter are objective of this study and the scope of the study.

The third chapter deals with the limitations of this study.

The fourth chapter deals with the theoretical perspective which include, Industry

Profile, Concept and Role of mutual fund, Various market players in Mutual Fund

market, Organization and Management of Mutual Funds, Investor’s Profile, Various

Mutual Fund Schemes, Advantages of Investing through Mutual Funds, Evolution &

Growth of Mutual Funds, Recent trends in Mutual Fund Industry and Risk Factors of

Mutual Fund.

The Fifth chapter deals with Methodology and Procedure of work.

The Sixth chapter deals with a detailed analysis of data.

The Seventh chapter deals with Conclusion and Recommendations

The final and eighth chapter contains Summary of the Project Report.

94

ANNEXURE II

REFERENCES

WEBSITES

http://www.appuonline.com/mf/knowledge/industry.html

http://finance.indiamart.com/markets/mutual_funds/

http://business.mapsofindia.com/mutual-funds/

http://www.mutualfundsindia.com/

http://www.amfiindia.com/

http:// www.kotakmutual.com /

http:// www.reliancemutual.com /

http://www.hdfcfund.com/

95

http://www.investopedia.com/

http:// www.moneycontrol.com/mutualfundindia/

http://www.valueresearchonline.com/

http://myiris.com/mutual/

http:// www.njindiainvest.com /

http://www.wikipidia.com/

http://www.indiainfoline.com/

OTHER REFERENCES:

Layman’s Guide to Mutual Funds By “OUTLOOK”

Mutual Funds Primer By “ECONOMIC TIMES”

MUTUAL FUND PRODUCT AND SERVICES---- TAXMAN

Sarkar, A.K., 1991, “MUTUAL FUNDS IN INDIA : EMERGING TRENDS”

ANNEXURE III

LIST OF CHARTS, FIGURES & TABLES

LIST OF CHARTS:

Chart – 1 Contribution of Various Players in Mutual Fund market in India...…………..15

Chart – 2 Growths in Assets under Management .............................................................54

Chart – 3 Asset Under Management..…………………………………………………....57

Chart – 4 Growth rate of Indian Mutual Fund Industry………………………………….57

Chart – 5 GDP of Different Countries………...………………………………….…..….58

Chart – 6 Risk Hierarchy of different Mutual Funds………………………………….....62

Chart – 7 Kotak Opportunities Fund Performance………………………………………76

Chart – 8 HDFC Core & Satellite Fund Performance …………………………….....….79

Chart – 9 Reliance Equity Opportunities Fund Performance…………………………....82

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Chart – 10 Franklin India Flexi Cap Fund Performance………………………………...86

Chart – 11 HSBC India Opportunities Fund Performance ………………..…….………89

LIST OF FIGURES:

Figure – 1 Mutual Fund Operation Flow chart…………………………………………12

Figure – 2 Concept of Mutual Fund…………….………………………………..…….14

Figure – 3 Structure of Mutual Fund………………………………………………...…19

Figure – 4 Organization of Mutual Fund…………………………………..……...……20

Figure – 5 Broad Mutual Fund Types…………………………………..……...………33

LIST OF TABLES:

Table – 1 Asset Under Management (AUM)…………………………...…………18

Table – 2 Comparison of Investment Products..……………………………….…..29

Table – 3 Asset Allocation………….………………………………………..…….46

Table – 4 Fund Mobilization in Phase-II…………………………………..………51

Table – 5 Gross Fund Mobilization in Phase-III ………….…………………..…...53

Table – 6 Snapshot of Mutual Fund Schemes………………………………..…….63

Table– 7 Kotak Opportunities Fund Performance…………………………………74

Table– 8 HDFC Core & Satellite Fund Performance ………………………….....77

Table – 9 Reliance Equity Opportunities Fund Performance……………………....80

Table – 10 Franklin India Flexi Cap Fund Performance………..…………………...84

Table – 11 HSBC India Opportunities Fund Performance ………………..………...87

Table – 12 Observations from Analysis of Schemes…………………………..…….90

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