A study on Mutual Funds vis a vis Bank Deposits

2009

A STUDY

ON

PEOPLE’S PERCEPTION ABOUT

MUTUAL FUND AND BANK DEPOSITS

BY

AMIT KUMAR

08BS0000256

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SUMMER INTERNSHIP PROGRAMME

A REPORT

ON

PEOPLE’S PERCEPTION ABOUT MUTUAL FUND AND BANK DEPOSITS

SUBMITTED TO

FACULTY GUIDE COMPANY GUIDE

Prof. ANUPAMA RAINA MOHD.WARIS KHAN

IBS, GURGAON MAHINDRA FINANCE

SUBMITTED BY

AMIT KUMAR

08BS0000256

DATE OF SUBMISSION: MAY 16, 2009

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AUTHORISATION

This report is submitted as partial fulfilment of the requirement of MBA

program of ICFAI BUSINESS SCHOOL. The report on the title

„People’s perception on Mutual Fund and Bank Deposits„ is an

original work and has not been submitted to any other institution or

university for the award of any degree or diploma.

Place: Gurgaon

Date : May 16, 2009 AMIT KUMAR

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ACKNOWLEDGEMENT

Apart from individual efforts, the success of any project depends largely on the

encouragement of many others involved directly and indirectly. I take this

opportunity to express my heartfelt gratitude to the people who have been

influential in the progress of this project.

I consider it my pleasant duty to acknowledge my deep sense of gratitude to my

company guide Mohammed Waris Khan for his continuous guidance and direction

to the exercise.

I am equally thankful to my faculty guide, Prof. Anupama Raina for her valuable

guidance and support for the project.

I am also grateful to Mr. K.N.Choudhary, Assistant Branch Manager, Indian Bank,

Anand Vihar branch for his cooperation and guidance in learning the nuances of

Banking Sector.

I would like to thank all the people of Mahindra Finance and ICFAI Business

School, Gurgaon, for the support they gave for the completion of the project.

Date: 16.05.2008

Place: Gurgaon

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TABLE OF CONTENTS

Table of Contents Pg.no.

Abstract……………………………………………………………………. 7

About the company……………………………………………………….. 8

Objective of the company………………………………………………… 9

Introduction……………………………………………………………….. 10

Objective of the project

Research Methodology……………………………………………………. 12

Game Plan

Overview of Mutual Funds………………………………………………...14

History of the Indian Mutual Fund Industry……………………………. 15

Types of Mutual Fund ……………………………………………………..18

According to its Structure

According to its investment Objective

Some other Important Funds

Means to measure Performance of Mutual Funds………………………. 23

Jenson‟s Alpha

Fama‟s Measure

Sharpe Ratio

Treynor Ratio

Advantages of Mutual Funds……………………………………………... 27

Disadvantages of Mutual Funds…………………………………………... 28

Risk associated with Mutual Funds………………………………………. 29

An overview of Banking………………………………………………….... 32

Banking structure of India………………………………………………….33

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Reserve Bank of India………………………………………………………. 35

Functions of Reserve Bank of India

Commercial Banks in India………………………………………………… 39

Functions of Commercial Bank in India

Deposits

Advances

Bank Deposits Vs. Mutual Funds………………………………………….. 44

Calculation of Financial ratios of selected funds…………………………..48

Formulae and abbreviations used

Calculation of Market Standard

UTI Opportunity Fund Growth

Reliance MIP Fund – Growth

HDFC Index Fund – Sensex

Decoding the survey…………………………………………………………56

Introduction

Limitations of the study

The Findings

Suggestions and Recommendations………………………………………...71

Conclusion…………………………………………………………………….72

References…………………………………………………………………….73

Glossary……………………………………………………………………….74

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ABSTRACT

I have been working in Mahindra & Mahindra Financial services limited (a

subsidiary firm of Mahindra &Mahindra) for 14 weeks. The company works as a

distributor of a large number of Fund houses. It also advises the retail investors in

making their investment decisions suiting their requirements. After analyzing the

working needs of my company, I decided to know the people‟s perception about

mutual funds and bank deposits. Different segments of investors go for different

mutual funds depending upon various factors but the number of people who go for

bank deposits is very large. I have tried to incorporate all prominent factors in my

study which play important role in mutual fund selection so it will help people to

select mutual funds as per their requirement.

The study will help the company in understanding the investment priorities of

different investors and accordingly provide them appropriate services.

Before the commencement of this survey, the company also provided me the

knowledge on mutual funds through various training sessions. It also increased my

level of knowledge in this field. I have also put many important terms, definitions

and facts related to mutual funds making my interim report more informational on

the topic.

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ABOUT THE COMPANY

Mahindra & Mahindra Financial Services Limited, a 100% owned subsidiary of

Mahindra & Mahindra provides services to individuals through customized

investment allocations and a high service approach. Its parent company Mahindra

&Mahindra; a financially strong, well-established and diversified institution

founded in 1945 has an excellent blend of experience and youth and has been

acknowledged as one of the most cohesive team in the Indian as well as Global

market.

Mahindra & Mahindra Financial Services Limited basically provides services in

following Products. These are-

Mutual Funds

Credit cards

Insurance

Vehicle loan

Personal loans

Home loans

With the entry of leading International brands in financial sector & the reputed

business houses in the country fighting it out to have a share of the growing Indian

Financial Market pie, Mahindra &Mahindra Financial Services Limited is like

an Unbiased Advisor for the clients emerged, which provides the Customer the

option of all the Banks/Financial companies under one roof.

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The company strives to provide transparent, ethical and research-based

investments and wealth management services. Its financial advisory services offer

a comprehensive need analysis to help the clients identify their goals, needs and

priorities over the short, medium and long term. The advisors at Mahindra Finance

also undertake a risk analysis to identify what levels of investment risk suit the

customers so that they can offer the most appropriate advice and financial solutions

Objective of the company:

Following is the main objectives of the company:

1) To become the preferred financial institution in rural and semi urban areas.

2) To gather knowledge on mutual funds, credit cards, insurance, personal loans,

vehicle loans and home loans and disperse the same to the benefit of its

customers.

3) To find out the suitable retail investors and identify their-

Goal of investment.

Desired investment options.

Risk bearing capability of the Individual.

Desired investment period.

Pattern of investment.

4) To analyze the data collected and advise the suitable investment plan to them.

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INTRODUCTION

The project aims at profiling the investors and thus understanding their psyche. It

will help in marshalling key information about the investors‟ perceptions and

preferences and thus would enable to locate prospective investors of Mutual Funds

and bank deposits. In the process of comparing the two investments it will unmask

the advantages and disadvantages associated with them. It will help the investors

and investment managers alike in making more informed decisions. The Study will

also help in finding out the problems related to distribution.

Managerial Usefulness of Study:

It provides the distributors as well as the Asset management companies

information regarding choices and preferences about people‟s investment

practices.

The study has tried to fathom investors‟ psyche regarding mutual fund

schemes vis a vis the bank deposits that are considered to be safer.

The study has tried to profile customer behavior while investing in a scheme.

The study has tried to find out the latent expectations of customers from the

distributors and AMCs.

The study has tried to study the customer behavior at different market

conditions.

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OBJECTIVE

To study the mutual fund industry in detail

To study banking sector in detail

To study the investment procedure of mutual fund and bank

To study the investment preference regarding investment

Suggesting what information should be provided to the customer

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RESEARCH METHODOLOGY

I decided to do the project in two parts. The first part of the project is comprised of

the study of Mutual Funds and banking sector as a whole and the second part deals

with the investor‟s perception regarding their investment preferences about

investment in Mutual Funds and banking sector.

The first part of the project i.e. descriptive study is comprising an overall

study of Mutual funds as what it is ,why to invest and where to invest, risk factor

associated with it ie, an overview of whole Mutual fund industry and the details

about the banking sector, type of banking etc.

The second part of the project that is related to investor‟s perception about

investment in Mutual funds available in market and the investment in the banking

sector. Indian Stock market has undergone tremendous changes over the years.

Investment in Mutual Funds has become a major alternative among Investors. The

project has been carried out to understand investor‟s perception about Mutual

Funds in the context of their trading preference and explore investor‟s risk

perception.

The first part of the project relating the study of Mutual funds is collected

through secondary data obtained from internet & books whereas the second part

relating the Investors perception about investment in Mutual Funds and banking is

covered using primary data.

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THE GAME PLAN

SURVEY DESIGN

For the purpose of study the population sample among the earning class has been

chosen. Population has not been segmented on any basis for the purpose.

RESEARCH INSTRUMENT

The work has been carried out through self administered questionnaires. The

questionnaire includes both open ended and close ended questions.

DATA COLLECTION

The data collected for the study can be broadly classified into two categories:

Primary Source: It includes questionnaires, interviews and word of mouth.

Secondary source: It includes company records, past data records, internet

sources and books.

DATA ANALYSIS

The data will be analyzed by using mathematical techniques. I shall use various

statistical tools to accomplish the job including SPSS

Primary Sources

Secondary Sources

Books

Internet

Company Database

Word of mouth

Personal Interviews

Questionnaires

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OVERVIEW OF MUTUAL FUNDS

DEFINITION

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

a common financial goal. The money thus collected is then invested in capital

market instruments such as shares, debentures and other securities. The income

earned through these investments and the capital appreciation realized is shared by

its unit holders in proportion to the number of units owned by them. Thus a Mutual

Fund is the most suitable investment for the common man as it offers an

opportunity to invest in a diversified, professionally managed basket of securities

at a relatively low cost. The flow chart below describes broadly the working of a

mutual fund.

SEBI

AMC

Unit holders

Savings

Unit

s

Trust Investments

Returns

Trust

AMC Custodian

Registrar

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The structure of Mutual Funds in India is governed by SEBI (Mutual Fund)

Regulations, 1996.

It is mandatory to have a three tier structure of Sponsor – Trustee – Asset

Management Company.

The trust is established by a Sponsor or more than one sponsor who is like a

promoter of a company. He appoints the Trustees who are responsible to the

investors of the fund.

The Trustees of the mutual fund hold its property for the benefit of the unit

holders.

Asset Management Company (AMC) approved by SEBI is the business face of

the mutual fund as it manages all the affairs of the fund by making investments

in various types of securities.

HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY 1963 – UTI, India‟s first mutual fund, launched

1964 – UTI launches US-64

1986 – UTI Mastershare, India‟s first true „mutual fund‟ scheme launched.

1987 – PSU banks and Insurers allowed to float mutual funds; SBI first of

the block.

1992 – Harshad Mehta – fuelled bull market arouses middle class interest in

shares and mutual funds.

1993 – Private sector and foreign sectors allowed; Kothari Pioneer first private

fund house to start operations; SEBI set up to regulate industry.

1994 – Morgan Stanley is the first foreign player.

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1996 – SEBI‟s mutual funds rules and regulations, which form the basis of most

current laws came into force.

1998 – UTI Master Index Fund is India‟s first Index fund.

1999 – The takeover of 20th Century AMC by Zurich Mutual Fund is the first

acquisition in the industry.

2000 – The industry‟s assets under management (AUM) crossed Rs.100,000

crore.

2001 - US-64 scam leads to UTI overhaul.

2002 – UTI bifurcated , comes under SEBI purview; mutual fund distributors

banned from giving commissions to investors; floating rate funds and foreign

debt funds debut.

2003 - AMFI certification made compulsory for new agents.

2004 - Long term capital gains exempt from tax for equity funds. Securities

transaction tax introduced.

2005 – The industry‟s AUM crossed Rs.2,00,000 crore. Section 80C

introduced, which allows upto Rs.1,00,000 in equity – linked saving

schemes(ELSS) for deduction from total taxable income.

2006 – AUM crosses Rs.300,000 crore in October.

2007 – Mutual funds launched Gold ETFs schemes that will invest in overseas

securities.

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TYPES OF MUTUAL FUNDS

Getting a handle on what's under the hood helps one become a better investor and

put together a more successful portfolio. To do this one must know the different

types of funds that cater to investor needs, whatever the age, financial position, risk

tolerance and return expectations. The mutual fund schemes can be classified

according to both their investment objective (like income, growth, tax saving) as

well as the number of units (if these are unlimited then the fund is an open-ended

one while if there are limited units then the fund is close-ended).

This section provides descriptions of the characteristics -- such as investment

objective and potential for volatility of one‟s investment -- of various categories of

funds. These descriptions are organized by the type of securities purchased by each

fund: equities, fixed-income, money market instruments, or some combination of

these. Mutual fund schemes may be classified on the basis of its structure and its

investment objective –

Types of mutual fund according to its structure

OPEN-ENDED SCHEMES:

Open-ended schemes do not have a fixed maturity period. Investors can buy or sell

units at NAV-related prices from and to the mutual fund on any business day.

These schemes have unlimited capitalization, open-ended schemes do not have a

fixed maturity, there is no cap on the amount a person can buy from the fund and

the unit capital can keep growing. These funds are not generally listed on any

exchange.

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Open-ended schemes are preferred for their liquidity. Such funds can issue and

redeem units any time during the life of a scheme. Hence, unit capital of open-

ended funds can fluctuate on a daily basis. The advantages of open-ended funds

over close-ended is that they have any time exit option; the issuing company

directly takes the responsibility of providing an entry and an exit. This provides

ready liquidity to the investors and avoids reliance on transfer deeds, signature

verifications and bad deliveries. Any time entry option, an open-ended fund allows

one to enter the fund at any time and even to invest at regular intervals.

CLOSE ENDED SCHEMES:

Close-ended schemes have fixed maturity periods. Investors can buy into these

funds during the period when these funds are open in the initial issue. After those

such schemes cannot issue new units except in case of bonus or rights issue.

However, after the initial issue, a person can buy or sell units of the scheme on the

stock exchanges where they are listed. The market price of the units could vary

from the NAV of the scheme due to demand and supply factors, investors'

expectations and other market factors.

INTERVAL FUNDS:

Interval funds combine the features of open-ended and close-ended schemes. They

are open for sale or redemption during pre-determined intervals at NAV related

prices.

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Types of mutual funds according to investment objective

At the fundamental level, there are four types of mutual funds:

1) GROWTH FUND

2) INCOME FUND

3) BALANCED FUND

4) MONEY MARKET MUTUAL FUNDS

GROWTH FUND:

These funds invest majority of their pooled amount with the objective of achieving

long term capital appreciation. Their major investments are in equity and equity

related instruments which can give high return in form of capital appreciation.

INCOME FUND:

These funds provide periodic return to investors in form of dividend. These funds

invest in securities which provide regular return and such returns are distributed to

the investors in form of dividend. These funds primarily invest in Gilt securities,

Bonds and debentures, etc. which is regarded as safe investments in India. Thus

not only these funds provide regular return but are also less risky.

BALANCED FUND:

These funds are a midway between income funds and growth funds. They balance

their investments in such a way that investors not only get periodic return but their

capital also tends to appreciate.

MONEY MARKET MUTUAL FUNDS:

MMMFs are mutual funds that invest primarily in money market instruments of

very high quality and of very short duration. Minimum lock in period is 15 days.

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Some other important funds are:-

INDEX FUNDS:

Index funds are those funds which create a portfolio which replicate the

composition of a particular index. For example an index fund on NIFTY will

invest in all the securities which are a part of that index and the proportion is also

similar to the weights which the individual securities have in that index. Thus these

funds tend to replicate the performance of that index.

TAX SAVING SCHEMES:

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

Indian Income Tax laws as the Government offers tax incentives for investment in

specified avenues. Investments made in Equity Linked Savings Schemes (ELSS)

and Pension Schemes are allowed as deduction u/s 88 of the Income Tax Act,

1961. The Act also provides opportunities to investors to save capital gains u/s

54EA and 54EB by investing in Mutual Funds, provided the capital asset has been

sold prior to April 1, 2000 and the amount is invested before September 30, 2000.

EXCHANGE TRADED FUNDS:

Exchange traded funds or popularly known as ETFs are mutual funds whose units

are traded on stock exchange. Unlike the traditional funds in which units are

directly redeemed by the mutual fund itself, the units of these funds are bought and

sold in the market just like shares. It is worth mentioning here that these funds can

be open ended or close ended. Their only distinctive feature is that they are

tradable on stock exchanges.

GOLD EXCHANGE TRADED FUNDS:

These are ETFs which are traded on stock exchange with underlying asset as gold.

They provide a convenient and easy vehicle for retail investors to participate in

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gold bullion market. Thus the fund issues a certificate for specified amount of gold

to its unit holders. The scheme is listed on stock exchange and hence investors can

buy and sell the units on stock exchange. The advantage here is that there is no risk

of holding physical gold stock and investor can still have a notional claim over

units of gold. The units are affordable as opposed to physical gold which can be

bought in specified quantities. Tracking error is also less in these funds.

FUND OF FUNDS:

These are funds which instead of investing into securities and bonds invest in other

funds. This helps in diversifying the fund.

Flowchart Showing Types of Mutual Funds

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MEANS TO MEASURE PERFORMANCE OF MUTUAL FUNDS

Measuring performance of a fund is a critical task which cannot be escaped by

either the advisors or the customers. It must be bore in the mind during the task

that one must compare the fund not only by measuring the returns but also risk

involved in it. Hence the risk return trade off is to be considered. Moreover only

funds with similar objectives must be compare together. Mutual funds are broadly

measured on two basis of performance –

1. ABSOLUTE PERFORMANCE: These measures provide an indication of

the performance of a fund as a whole. The performance is not compared

with other funds. The following measures give the absolute performance.

Jenson’s alpha

Fama’s measure

2. RELATIVE PERFORMANCE: These measures provide the relative

performance of mutual funds. Hence it helps in comparison of two funds.

Sharpe ratio

Treynor ratio

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JENSON’S ALPHA

Jenson‟s alpha helps us in identifying whether the fund has been able to outsmart

its expected returns.

Where, Rm = the return earned by the fund

Re = the return expected from a fund

Hence the process evaluates a fund on the basis of excess return earned over its

expected return. The value is expressed in percentage. If the value of the fund is

positive it is preferred.

FAMA’S MEASURE

It is measured by the given formulae:

Where, Rp = actual return on portfolio

Rf = risk free return

Rm= return on market index

Σp = standard deviation of portfolio return

Σm = standard deviation of market index return

Thus it takes into account standard deviation of stock returns as well as the

standard deviation of market returns unlike beta which takes into account only

market risk.

Jenson’s alpha = Rm - Re

Fama’s measure =Rp –* Rf + (σp/σm)(Rm-Rf)]

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SHARPE RATIO

Sharpe ratio is a tool to measure the performance of a mutual fund over the period

of time.

This measure take into account surplus return earned by the fund over risk free rate

of interest and then divides it by standard deviation of the portfolio return. The

logic is that while comparing performance of various mutual funds we should see

“surplus return over risk free market” per unit of standard deviation. Thus we are

comparing return per unit of risk taken.

For example-

FUND A FUND B

Risk free rate of return 8% 8%

Return of portfolio 14% 18%

Standard deviation of portfolio 20% 40%

Sharpe ratio (14-8)/20=0.3 (18-8)/40=0.25

Apparently it seems Fund B is better because of higher return(18%).But when we

consider risk taken measured through standard deviation we find Fund A is better

because the earnings per unit of risk taken is higher.

Return of the portfolio - risk free rate of interest Sharpe ratio = -------------------------------------------------------------------- Standard deviation of portfolio return

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TREYNOR RATIO

Treynor ratio too takes into account surplus return earned over risk free return over

risk free return but the measure of risk here is beta rather than standard deviation.

This emphasis is more on market risk (systematic risk) rather than deviation

returns from the mean. This measure is more relevant as unsystematic risk is

negligible in overall portfolio of a mutual fund.

Explanation-

FUND A FUND B

Risk free rate of return 8% 8%

Return of portfolio 14% 18%

Beta of the portfolio .7 1.4

Treynor ratio (14-8)/.7=8.57% (18-8)/1.4=7.14%

Fund A is better in spite of lower returns because of lower market risk.

Return of the portfolio – risk free rate of interest Treynor ratio = ---------------------------------------------------------------------- Beta of the portfolio

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ADVANTAGES OF MUTUAL FUNDS

1. Professional Management -

The primary advantage of funds (at least theoretically) is the professional

management of the invested money. Investors purchase funds because they do not

have the time or the expertise to manage their own portfolios. A mutual fund is a

relatively inexpensive way for a small investor to get a full-time manager to make

and monitor investments.

2. Diversification -

By owning shares in a mutual fund instead of owning individual stocks or bonds,

your risk is spread out. The idea behind diversification is to invest in a large

number of assets so that a loss in any particular investment is minimized by gains

in others. In other words, the more stocks and bonds you own, the less any one of

them can hurt you (think about Enron). Large mutual funds typically own hundreds

of different stocks in many different industries. It wouldn't be possible for an

investor to build this kind of a portfolio with a small amount of money.

3. Economies of Scale

Because a mutual fund buys and sells large amounts of securities at a time, its

transaction costs are lower than what an individual would pay for securities

transactions.

4. Liquidity

Just like an individual stock, a mutual fund allows you to request that your shares

be converted into cash at any time.

5. Simplicity -

Buying a mutual fund is easy! Pretty well any bank has its own line of mutual

funds, and the minimum investment is small.

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DISADVANTAGES OF MUTUAL FUNDS

1. Professional Management -

Many investors debate whether or not the so-called professionals are any better

than you or I at picking stocks. Management is by no means infallible, and, even if

the fund loses money, the manager still takes his/her cut.

2. Costs

Mutual funds don't exist solely to make our life easier - all funds are in it for a

profit. The mutual fund industry is masterful at burying costs under layers of

jargon.

3. Dilution

It's possible to have too much diversification. Because funds have small holdings

in so many different companies, high returns from a few investments often don't

make much difference on the overall return. Dilution is also the result of a

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

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

money.

4. Taxes

When making decisions about our money, fund managers don't consider our

personal tax situation.

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RISKS ASSOCIATED WITH MUTUAL FUNDS

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 upto 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

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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 determine 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 costed 50 paisa?” “Mehangai Ka

Jamana Hai.”

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

of times people make conservative investment decisions to protect their capital but

end up with a sum of money that can buy less than what the principal could at the

time of the investment. This happens when inflation grows faster than the return on

your investment. A well-diversified portfolio with some investment in equities

might help mitigate this risk.

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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 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. You have been reading about diversification above, but what is it?

Diversification The nuclear weapon in your arsenal for your fight against Risk . It

simply means that you must spread your investment across different securities

(stocks, bonds, money market instruments, real estate, fixed deposits etc.) and

different sectors (auto, textile, information technology etc.). This kind of a

diversification may add to the stability of your returns.

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AN OVERVIEW OF BANKING

A bank is a government-licensed financial institution whose primary activity is to

act as a payment agent for customers and to borrow and lend money at differing

maturities. It is an institution for receiving, keeping, and lending money at interest.

In order to make profits, modern banks generally "borrow short and lend long" (i.e.

take money from depositors and lend that money for longer-term projects).

Many other financial activities were added over time. For example banks are

important players in financial markets and offer financial services such as

investment funds. In some countries such as Germany, banks are the primary

owners of industrial corporations. In Japan, banks are usually the nexus of a cross-

share holding entity known as the zaibatsu. In France, bancassurance is prevalent,

as most banks offer insurance services (and now real estate services) to their

clients.

TRADITIONAL ACTIVITIES OF A BANK

Banks act as payment agents by conducting checking or current accounts for

customers, paying cheques drawn by customers on the bank, and collecting

cheques deposited to customers' current accounts. Banks also enable customer

payments via other payment methods such as telegraphic transfer, EFTPOS and

ATM.Banks borrow money by accepting funds deposited on current accounts, by

accepting term deposits, and by issuing debt securities such as banknotes and

bonds. Banks lend money by making advances to customers on current accounts,

by making installment loans, and by investing in marketable debt securities and

other forms of money lending. Banks provide almost all payment services, and a

bank account is considered indispensable by most businesses, individuals and

governments.

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BANKING STRUCTURE OF INDIA

Banking in India originated in the last decades of the 18th century. The oldest

bank in existence in India is the State Bank of India, a government-owned bank

that traces its origins back to June 1806 and that is the largest commercial bank in

the country. Central banking is the responsibility of the Reserve Bank of India,

which in 1935 formally took over these responsibilities from the then Imperial

Bank of India, relegating it to commercial banking functions. After India's

independence in 1947, the Reserve Bank was nationalized and given broader

powers. In 1969 the government nationalized the 14 largest commercial banks; the

government nationalized the six next largest in 1980.

Currently, India has 88 scheduled commercial banks (SCBs) - 27 public sector

banks (that is with the Government of India holding a stake), 31 private banks

(these do not have government stake; they may be publicly listed and traded on

stock exchanges) and 38 foreign banks. They have a combined network of over

53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a

rating agency, the public sector banks hold over 75 percent of total assets of the

banking industry, with the private and foreign banks holding 18.2% and 6.5%

respectively.

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RESERVE BANK OF INDIA

The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act,

1934 (II of 1934) provides the statutory basis of the functioning of the Bank. It acts

as the central bank of the country. It was established in April 1935 with a share

capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young

Commission. Reserve Bank of India was nationalised in the year 1949.

The Bank was constituted for the need of following:

To regulate the issue of banknotes

To maintain reserves with a view to securing monetary stability and

To operate the credit and currency system of the country to its advantage.

FUNCTIONS OF THE RESERVE BANK OF INDIA

The Reserve Bank of India Act of 1934 entrust all the important functions of a

central bank to the Reserve Bank of India

Bank of Issue

Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to

issue bank notes of all denominations. The distribution of one rupee notes and

coins and small coins all over the country is undertaken by the Reserve Bank as

agent of the Government. Besides it the Reserve Bank of India also maintains gold

and foreign exchange reserves of Re. 200 crores, of which at least Rs. 115 crores

are in gold in the form of minimum reserve system.

Page | 36

Banker to Government

The Reserve Bank is agent of Central Government and of all State Governments in

India except that of Jammu and Kashmir. The Reserve Bank has the obligation to

transact Government business, via. to keep the cash balances as deposits free of

interest, to receive and to make payments on behalf of the Government and to carry

out their exchange remittances and other banking operations. The Reserve Bank of

India helps the Government - both the Union and the States to float new loans and

to manage public debt. The Bank makes ways and means advances to the

Governments for 90 days. It makes loans and advances to the States and local

authorities. It acts as adviser to the Government on all monetary and banking

matters.

Bankers' Bank and Lender of the Last Resort

The scheduled banks can borrow from the Reserve Bank of India on the basis of

eligible securities or get financial accommodation in times of need or stringency by

rediscounting bills of exchange. Commercial banks can always expect the Reserve

Bank of India to come to their help in times of banking crisis. Hence they have

been termed as the „lender of last resort‟. The reserve Bank stipulates that the

commercial banks maintain the reserves in the form of SLR and CRR for the same

purpose.

Page | 37

Controller of Credit

The Reserve Bank of India is the controller of credit i.e. it has the power to

influence the volume of credit created by banks in India. It can do so through

changing the Bank rate or through open market operations. According to the

Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular

bank or the whole banking system not to lend to particular groups or persons on the

basis of certain types of securities. Since 1956, selective controls of credit are

increasingly being used by the Reserve Bank.

Every bank has to get a license from the Reserve Bank of India to do banking

business within India. The Reserve Bank has also the power to inspect the accounts

of any commercial bank.

As supreme banking authority in the country, the Reserve Bank of India, has the

following powers:

(a) It holds the cash reserves of all the scheduled banks.

(b) It controls the credit operations of banks through quantitative and qualitative

controls.

(c) It controls the banking system through the system of licensing, inspection and

calling for information.

(d) It acts as the lender of the last resort by providing rediscount facilities to

scheduled banks.

Page | 38

Custodian of Foreign Reserves

As the Central bank is the custodian of the country‟s foreign exchange reserves it

is vested with the responsibility of managing the investments and utilization of the

reserves in foreign exchange. It acts as the custodian of India's reserve of

international currencies. The Reserve Bank of India has the responsibility to

maintain the official rate of exchange. It manages the investment of reserves in

gold accounts abroad and the shares securities issued by foreign governments and

international banks or financial institutions.

Supervisory functions

In addition to its traditional central banking functions, the Reserve bank has certain

non-monetary functions of the nature of supervision of banks and promotion of

sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation

Act, 1949 have given the RBI wide powers of supervision and control over

commercial and co-operative banks, relating to licensing and establishments,

branch expansion, liquidity of their assets, management and methods of working,

amalgamation, reconstruction, and liquidation. The RBI is authorised to carry out

periodical inspections of the banks and to call for returns and necessary

information from them. The nationalisation of 14 major Indian scheduled banks in

July 1969 has imposed new responsibilities on the RBI for directing the growth of

banking and credit policies towards more rapid development of the economy and

realisation of certain desired social objectives.

Promotional functions

The Reserve Bank of India plays the role of a promoter of financial institutions in

the country. It has promoted specialized institutions such as IDBI, NABARD,

DFHI, STCI to ensure flow of credit.

Page | 39

COMMERCIAL BANKS IN INDIA

The commercial banking structure in India consists of

Scheduled Commercial Banks in India

Unscheduled Banks in India

Scheduled Banks in India constitute those banks which have been included in the

Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes

only those banks in this schedule which satisfy the criteria laid down vide section

42 (6) (a) of the Act.

Currently, there are 300 scheduled banks in India having a total network of 64,918

branches. The scheduled commercial banks in India comprise of State bank of

India and its associates (8), nationalized banks (19), foreign banks (45), private

sector banks (32), co-operative banks and regional rural banks.

"Scheduled banks in India" means the State Bank of India constituted under the

State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the

State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding

new bank constituted under section 3 of the Banking Companies (Acquisition and

Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking

Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or

any other bank being a bank included in the Second Schedule to the Reserve Bank

of India Act, 1934 (2 of 1934), but does not include a co-operative bank".

"Non-scheduled bank in India" means a banking company as defined in clause (c)

of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a

scheduled bank".

Page | 40

FUNCTIONS OF A COMMERCIAL BANK

Commercial banks in India performs multifarious tasks few of which are

being laid down here –

Receiving Deposits

This is the main function of commercial banks to collect savings of individuals and

firms. They offer different types of deposits for the facility of the customers.

Demand Deposits

Investor can withdraw money at any time. Bank is responsible to return the money

on customer‟s demand. This account allows you to demand your money at any

time.

Term Deposit

Under this scheme money is deposited for a fixed period of time so it is also called

Fixed Deposit. Investor can withdraw the money only after the time period.

Premature withdrawals are also allowed by paying a penalty. Interest is calculated

on monthly, quarterly or yearly depends on the bank and scheme. Many banks

offer loan or overdraft facility as added features with fixed deposits. Term deposits

are a safe investment and it is therefore a very good option for conservative, low-

risk investors.

Recurring Deposit

This is another type of fixed deposit in which investor pay a small amount every

month for a specific time period. For example pay Rs.1000/- every month for a

period of 5 years. After 5 years he/she will get the principle with interest

accumulated. A Recurring Bank Deposit is a good option for regular savings.

Page | 41

Saving Account

This is a kind of demand deposit with limited number of withdrawals during any

specific period. Savings Accounts provide principal security and a modest interest

rate. Now banks also put some restriction on the minimum balance. If customer

don‟t maintain the minimum balance customer has to pay a penalty. Now saving

account comes with many features like ATM and Debit Card, Cheque Book, Free

Internet Banking with Bill Pay, Fund Transfer, Prepaid mobile charging, Free

Telephone Banking etc.

Current Account

This is another kind of demands deposit like saving account with unlimited

withdrawals. There are many different Current Accounts available in today. From

specialist young people bank accounts to Current Accounts (with overdraft),

Cheque Accounts, Basic Bank Accounts, Student Accounts, Graduate Accounts,

Foreign Currency Accounts and Current Accounts with special offers.

Certificate of Deposits

Certificate of deposits are negotiable promissory note, secure and short term in

nature. These are issued by the scheduled commercial banks (excluding Regional

Rural Banks and Local Area Banks) and selected financial institutions to raise

short term resources. These are issued at discount to the face value. Certificate of

deposits can be issued to any individual, corporations, etc. and even NRIs but on

non repatriable basis. The minimum investment is Rupees One Lakh. The maturity

period of these certificates issued by banks lies between 7 days and 1 year, while

the same for financial institutions is between 1 year and 3 year.

Page | 42

Apart from these basic deposit patterns different bank have different investment

options and criteria. Also interest rate varies from bank to bank. To attract more

customers banks offers different fixed deposit schemes like Tax Saver Fixed

deposits, fixed deposits with life insurance, health insurance, free credit card,

instant loan facility, pre-approved loans etc. For NRIs (non residential Indians)

banks are providing all these deposits accounts with few of them even providing

flexibility for transactions in foreign currencies. Few citations are as follows-

Foreign currency non – residents accounts

FCNR A/C is maintained only in term deposit. The account can be maintained only

in pound Sterling, U.S. dollar, Deutsche Mark and Japanese Yen. The deposit is

accepted for a period not below six months and not above three years. Remittance

from abroad is to be made in the foreign currency in which the account is desired

to be maintained. The balances and the interest on this account are exempt from

tax.

Cash certificates

These certificates are issued with different face values payable after specified

maturity periods. The issue prices for different maturity periods are specified in

advance.

Savings account linked with Fixed deposit

Under this scheme the depositor specifies the maximum amount in his savings

bank account beyond which the balance is to be automatically transferred to a fixed

deposit account the maturity of which is transferred to a fixed deposit account the

maturity of which is decided by him/her.

Page | 43

Advancing Loans

This is an important function of the commercial bank. Credit is given to the people

in different ways.

Providing loans

Loans are provided to the general public to meet their requirements subject to the

fulfillment of certain conditions and having satisfied that the person will be able to

pay back. There are three types of loans given to borrowers.

Short Term Loans

These loans are advanced for the period of six months to one year. High

interest is charged on such loans.

Medium Term Loans

Loans from one to five years are called medium term loans.

Long Term Loans

Loans which are advanced for the period, more than ten years.

Page | 44

Bank Overdraft

Banks allows their trustful customers to draw more than the deposit they have in

the Bank. Bank charges interest on overdraft. They may use this money to meet

any of their liabilities.

Cash Credit

Bank gives credit against immovable property for meeting up working capital

needs of a businessman or institution. This facility is known as cash credit. Cash

credit was started on the recommendations of Tandoon committee.

Discounting of Bills

Banks purchases or discounts bills after deducting a certain amount as his charges

or discount. This boosts up the balance of the bank and also keeps the economy

running.

BANK DEPOSIT (FIXED DEPOSIT) vs. MUTUAL FUNDS

Depositors prefer Banks mainly for its fixed deposit schemes. This I inferred

during my survey in preliminary days collating initial Information Report. This is

because of the less risk and assured return available on them. This ensues a debate

whether to choose Fixed deposits or mutual funds; and that is the nuclei of my

project. The motive behind understanding customer preferences on mutual fund

and bank deposits. After studying exhaustively I found that it depends on whether

somebody is looking at performance, safety or just returns. I undertook an exercise

to make this task simpler for understanding.

Let us first look at various fixed deposits from manufacturing companies and non-

banking finance companies (NBFCs) where an investor can get reasonably decent

returns. These deposits have been selected for safety and returns.

Page | 45

Name 1-YR 2-YR 3-YR Minimum (Rs) Rating

Ashok Leyland 11.00% 11.50% 12.00% 1,000 FAA

Dewan housing 10.50% 11.00% 11.50% 2,000 AA

Mahindra Finance 10.25% 11.25% 11.75% 10,000 FAA+

Cholamandalam 10.00% 11.00% 12.00% 10,000 MAAA

Kotak Mahindra 9.50% 10.00% 10.25% 10,000 FAAA

HDFC Ltd. 9.00% 9.25% 9.75% 10,000 FAAA

Fenner India Ltd. 9.00% 10.00% 11.00% 5,000 FAA+

TISCO NA NA 10.50% 15,000 FAAA

Larsen & Toubro NA NA 10.00% 10,000 AAA

BASF NA NA 10.50% 10,000 FAAA

(The above companies are sorted on one year returns)

These deposits should be given priority as they have relatively lower risk. These

companies have been ranked highly by credit-rating agencies, so there are fewer

chances of default. However returns on these deposits are commensurately low (in

line with the lower risk profile) with 9-11% over 1 year. Bank deposits (for 12

months) also give returns ranging from 6.5-8%, and are popular among investors.

BANK NAME /

DURATION

15-29

days

30-45

days

46-60

days

61-90

days

91-120

days

120-179

days

180-270

days

271-364

days

ABN-Amro Bank 4 4.5 4.5 4.5 6.5 6.5 6.5 6.5

Citi Bank 3.5 4.5 5 5.5 7 7 8 8

The HongKong & Shanghai 3.5 4.25 5.25 5.25 5.25 5.25 5.5 8

Dena Bank 4.25 4.75 5.25 5.25 6.75 7 7.5 8

Indian Bank 3.75 4 5 5 6 6 7.25 7.5

State Bank of India 4.25 4.25 5.25 5.25 6.5 6.5 7.25 7.25

Axis Bank 3 4 5 5 6.5 6.5 7 8

Development Credit Bank 6 6 7 7 8 8 9 9

HDFC Bank 3.5 4 4.5 5 5.5 5.5 7 6.75

ICICI Bank 3.75 4 4 4 6.25 6.25 7.25 8

Karnataka Bank 4.5 4.5 5.5 5.5 7.5 7.5 8.5 8.5

Tamilnadu Mercantile Bank 5.5 5.5 7 7 7.5 7.5 8.75 8.75

The Bank of Rajasthan Ltd 4.25 4.25 4.5 4.5 7.25 8 8.75 8.75

The Catholic Syrian Bank 4.75 5.75 5.5 5.5 7.25 7.25 8.5 8.5

The Lakshmi Vilas Bank 5 5.5 6 6 7 7 8.25 8.5

Page | 46

But the unfortunate letdown by the Karad Bank (during the Harshad Mehta scam)

and then Madhavpura Mercantile Co-operative Bank (in Ketan Parekh scam) have

served as painful reminders to investors about the risk profile of these FDs.

Now lets see how the much-maligned mutual funds fare vis-à-vis fixed deposits. I

have taken income and gilt funds for the study, which are relatively safe by virtue

of their investments most of which are in AAA/AA+ securities.

As is evident from the table above leading income funds have clocked over 18%

growth over the last 12 months. A lower interest rate regime has pulled down

bonds yields (and pushed up bond prices) and income funds have been major

beneficiaries. However these returns may not be sustainable in future and investors

need to see the table in that perspective. However income funds are expected to

continue offering higher or comparable returns to FDs. And if I take tax efficiency

(given that mutual fund dividends are tax free) and liquidity, mutual funds are a

winner.

OPEN-ENDED, INCOME FUNDS NAV (Rs) 12-MONTH (%)

K BOND WHOLESALE G 12.8 18.7%

PIONEER ITI INCOME BUILDER (G) 17.4 18.6%

IDBI PRI DEP BOND G 12.0 18.4%

GRINDLAYS SP SAV G 11.8 18.3%

K BOND-DEP G 12.7 17.9%

DSP ML BOND G 17.2 17.5%

ZURICH HIGH INT G 17.3 17.4%

SUNDARAM BOND A 16.2 17.4%

TEMPLETON INC G 18.0 16.9%

PRU ICICI INC G 14.9 16.9%

Page | 47

Gilts (govt. securities) funds have outperformed FDs and income funds in a big

way. Gilt funds (in the table) have posted growth of over 20% over the last 12

months. Gilt funds have also benefited from the lower interest rate regime. And if

you consider the fact that gilts are safer than even AAA securities, the returns are

very attractive. However, investors need to understand that gilt funds are exposed

to interest rate risk even if there is no credit risk.

OPEN-ENDED, GILT FUNDS NAV (Rs) 12-MONTH (%)

TEMPLETON GSEC G 14.5 25.2%

DSP ML GSEC A G 13.8 24.9%

BIRLA GILT LT G 13.7 24.0%

DUNDEE SOV G 14.0 23.9%

PRU ICICI GILT IG 13.8 22.9%

Page | 48

FORMULAE AND ABREVIATIONS USED

Rm= Return from the market.

Ra= Average value selected from value of Rm

(Rm-Ra)2

Variance = ∑ ------------------

N

Where N= Number of time period.

Standard deviation= √ Variance

Rp= Return from portfolio

Rb= Average value selected from value of Rp

Covariance (portfolio return, market return)

BETA = ------------------------------------------------------

Sm 2

Covariance = [(portfolio return-Rb) (market return-Ra)]/ N

Sm= Standard deviation of market

Jenson‟s alpha = Rm - Re

Fama‟s measure =Rp –[ Rf + (σp/σm)(Rm-Rf)]

Return of the portfolio - risk free rate of interest

Sharpe ratio = -------------------------------------------------------------------- Standard deviation of portfolio return Return of the portfolio – risk free rate of interest

Treynor ratio = ---------------------------------------------------------------------- Beta of the portfolio

Risk free rate has been taken as an average of interest rates on Fixed deposits by all banks in India as on April 16, 2009 which is 8.3%.

Page | 49

MARKET STANDARD DEVIATION

TIME

PERIOD

SENSEX DIFFERENCE Rm (%) Rm-Ra (%) (Rm-Ra)2

MAR-08 17578 - - - -

APR-08 15627 -1951 -11.09 -24.15 583.22

MAY-08 17288 1661 10.62 -2.44 5.95

JUN-08 16063 -1225 -7.08 -20.14 405.61

JUL-08 12962 -3101 -19.30 -32.36 1047.16

AUG-08 14656 1694 13.06 0 0

SEP-08 14498 -158 -1.07 -14.13 199.65

OCT-08 13056 -1442 -9.94 -23.0 529

NOV-08 9788 -3268 -25.03 -38.09 1450.80

DEC-08 8839 -949 -9.69 -22.25 499.52

JAN-09 9647 808 9.14 -3.92 15.36

FEB-09 9066 -581 -6.02 -19.08 364.04

MAR-09 8607 -454 -5.06 -18.12 328.33

∑=5428.64

NOTE: The value of Ra has been selected for August 2008 i.e. 13.06

VARIANCE = 5428.64/12 = 452.38

STANDARD DEVIATION = √452.38 = 21.26%

MARKET RETURN = (8607-15627)/15627= -44.9%

(Between April 08- March 09)

Page | 50

UTI OPPORTUNITIES FUND – GROWTH

TIME

PERIOD

NAV DIFFERENCE Rp(%) Rp-Rb

(%)

(Rp-Rb)2

MAR-08 19.10 - - - -

APR-08 17.33 -1.77 -9.26 -15.79 249.32

MAY-08 18.79 1.46 8.42 1.89 3.57

JUN-08 17.62 -1.17 -6.22 -12.75 162.56

JUL-08 15.00 -2.62 -14.86 -21.39 457.53

AUG-08 15.98 0.98 6.53 0 0

SEP-08 16.07 0.09 0.56 -5.79 35.64

OCT-08 14.74 -1.33 -8.27 -14.80 219.04

NOV-08 12.23 -2.51 -17.02 -23.55 554.60

DEC-08 11.31 -0.92 -7.52 -14.05 197.40

JAN-09 12.37 1.06 9.37 2.84 8.06

FEB-09 11.94 -0.43 -3.47 -10 100

MAR-09 11.47 -0.47 -4.43 -10.96 120.12

∑=2107.84

NOTE: The value of Rb has been selected for August 2008 i.e. 6.53

VARIANCE = 2107.84/12 = 175.65

STANDARD DEVIATION = √175.65 = 13.25%

PORTFOLIO RETURN = (11.47-17.33)/17.33= -33.8%


[(-44.9-13.06) (-33.8-6.53)]/12

BETA = ------------------------------------------------ = 0.44

(21.26)2

Page | 51

FINANCIAL RATIOS

SHARPE RATIO = (-33.8-8.3)/13.25 = -3.17

This fund is highly risky as indicated by its negative value -3.17 which shows that

surplus return per unit of risk is very low in this fund as due to its negative value

which restricts the public from investing in this fund. So for an investor he will

always prefer to invest in fixed deposit rather than this fund.

TREYNOR RATIO = (-33.8-8.3)/0.44= -95.68%

As indicated by negative percentage value of -95.68% shows that the return from

the fund is highly negative by taking per unit of market risk. So an investor

knowing and understanding this ratio will never invest in it and will prefer fixed

deposit rather than this fund.

JENSON’S ALPHA

Re = 8.3+0.44(-44.9-8.3) = -15.10

Alpha= -44.9-(-15.10) = -29.8%

Since the value of this fund is negative as -29.8% so the fund is not able to

outsmart market expectation which makes it unfriendly for investment for the

investor.

FAMA’S MEASURE=-33.8-[8.3 + (13.25/21.26) (-44.9-8.3)] = - 9.2%

This measure instead of taking only systematic risk takes into account standard

deviation of stock return as well as standard deviation of market return. The

negative value of -9.2% shows that the fund is risky to invest and fixed deposits is

better to invest in present market scenario where some return is safe.

Page | 52

RELIANCE MIP FUND - GROWTH

TIME

PERIOD


(%)

(Rp-Rb)2

MAR-08 14.51 - - - -

APR-08 14.14 -0.37 -2.54 -4.72 22.27

MAY-08 14.47 0.33 2.33 0.15 0.022

JUN-08 14.46 -0.1 -0.69 -2.87 8.23

JUL-08 14.18 -0.28 -1.93 -4.11 16.89

AUG-08 14.49 0.31 2.18 0 0

SEP-08 14.73 0.24 1.65 -0.53 0.28

OCT-08 14.51 -0.22 -1.49 -3.67 13.46

NOV-08 14.61 0.10 0.68 -1.5 2.25

DEC-08 14.58 -0.03 -0.20 -2.38 5.66

JAN-09 16.53 1.95 13.37 11.19 125.21

FEB-09 15.62 -0.91 -5.50 -7.68 58.98

MAR-09 15.53 -0.09 -0.57 -2.75 7.56

∑=260.81


VARIANCE = 260.81/12 = 21.73

STANDARD DEVIATION = √21.73= 4.66

PORTFOLIO RETURN = 15.53-14.14/14.14=7.02%


[(-44.9-13.06) (7.02-2.18)]/12

BETA = ------------------------------------------------ = -0.05

(21.26)2

Page | 53

FINANCIAL RATIOS

SHARPE RATIO = (7.02-8.3)/4.66 = -0.27

In this volatile circumstance when the trajectory of the sensex has been more on

the decline it‟s tough to find a scheme with a positive return. However even in this

tumultuous condition Reliance MIP with just -0.27 Sharpe ratio has shown a good

return to investors‟ expectation. It stands very near to the the expectations of the

people however still there has been loss if we compare it to fixed deposits.

TREYNOR RATIO = (7.02-8.3)/-0.05= -25.6

This ratio takes into account surplus return earned over risk free return but the

measure of risk here is beta rather than standard deviation .The emphasis is more

on market risk (systematic risk) that‟s why we measure here risk with beta .As

indicated by negative percentage value of -25.6% shows that the return from the

fund is negative by taking per unit of market risk. So an investor knowing and

understanding this ratio will never invest in it and will prefer insurance sector

rather than this fund.

JENSON’S ALPHA

Re = 8.3-0.05(-44.9-8.3) = 10.96

Alpha = -44.9-10.96= -55.86%

Since the value of this fund is negative - 55.86% so the fund is not able to outsmart

market expectation which makes it unfriendly for investment for the investor.

FAMA’S MEASURE =7.02-[8.3 + (4.66/21.26)(-44.9-8.3)]=9.89%

The positive value of 9.89% shows that there can be a investment possible in this

fund but for earning such low return people avoid to invest in it and do not want to

take risk it as its some part is also invested in equity which makes the some part of

the fund risky in present market scenario.

Page | 54

HDFC INDEX FUND-SENSEX

TIME

PERIOD


(%)

(Rp-Rb)2

MAR-08 145.43 - - - -

APR-08 136.11 -9.32 -6.4 -19.42 377.13

MAY-08 152.76 16.65 12.23 -0.79 0.62

JUN-08 139.41 -13.35 -8.73 -21.75 473.06

JUL-08 112.62 -26.79 -19.21 -32.23 1038.77

AUG-08 127.29 14.67 13.02 0 0

SEP-08 126.11 -1.18 -0.92 -13.94 194.32

OCT-08 114.20 -11.91 -9.44 -22.46 504.45

NOV-08 90.16 -24.04 -21.05 -34.07 1160.76

DEC-08 76.75 -13.41 -14.87 -27.89 777.85

JAN-09 85.48 8.73 11.37 -1.65 2.72

FEB-09 77.71 -7.77 -9.08 23.0 529

MAR-09 73.68 -4.03 -5.18 18.2 331.24

∑=5389.92


VARIANCE = 5389.92/12 = 449.16

STANDARD DEVIATION = √449.16= 21.19

PORTFOLIO RETURN = 73.68-136.11/136.11=-49.3%


[(-44.9-13.06) (-49.3-13.02)]/12

BETA = ------------------------------------------------ = 0.67

(21.26)2

Page | 55

FINANCIAL RATIOS

SHARPE RATIO = (-49.3-8.3)/21.19 = -2.71

This fund is highly risky as indicated by its negative value -2.71 which shows that

surplus return per unit of risk is very low in this fund as due to its negative value

which restricts the public from investing in this fund. So for an investor he will

always prefer to invest in banking rather than this fund.

TREYNOR RATIO = (-49.3-8.3)/0.67= -85.9%

This ratio takes into account surplus return earned over risk free return but the

measure of risk here is beta rather than standard deviation .The emphasis is more

on market risk (systematic risk) that‟s why we measure here risk with beta .As

indicated by negative percentage value of -85.9% shows that the return from the

fund is highly negative by taking per unit of market risk. So an investor knowing

and understanding this ratio will never invest in it and will prefer banking sector

rather than this fund.

JENSON’S ALPHA

Re = 8.3+0.67(-44.9-8.3) =-27.34

Alpha = -44.9-(-27.34) =-17.56

Since the value of this fund is negative as -17.56% so the fund is not able to

outsmart market expectation which makes it unfriendly for investment for the

investor.

FAMA’S MEASURE=-49.3-[8.3 + (21.19/21.26)(-44.9-8.3)]

= -4.94%

This measure instead of taking only systematic risk takes into account standard

deviation of stock return as well as standard deviation of market return. The

negative value of -4.94% shows that the fund is risky to invest and bank deposits

are better to invest in present market scenario where some return is safe.

Page | 56

DECODING THE SURVEY

INTRODUCTION

The survey for the purpose was conducted in New Delhi in between April 04,

2009 and April 11, 2009. As per the directions of the company guide the sample

was picked up from Surajmal Vihar, Anand Vihar, Ram Vihar and Yojna Vihar.

All these locations are in the East Delhi and were also the destination for all the

field works assigned by the company from time to time. The sample size is 50

with respondents between 21and 45 years of age. The average age of the

respondents is 31.64 years and the median age is 32 years. The income of the

respondents varied from a yearly income of Rs. 160000 to Rs. 1000000. The

average income of the respondent is Rs. 436000 and the median income is

Rs.400000. The respondents were chosen among the earning class. The survey

was conducted through structured questionnaire.

DEMOGRAPHIC PROFILE OF THE SAMPLE

Sample Size :50

Location : New Delhi (Surajmal Vihar , Anand Vihar, Ram

Vihar, Yojna Vihar)

Age :

Maximum – 45 years

Minimum – 21 years

Mean - 31.64 years

Median - 32 years

Income:

Maximum – Rs.1000000

Minimum - Rs.160000

Average - Rs.436000

Median - Rs.400000

Page | 57

LIMITATIONS OF THE STUDY

The results obtained from the survey and the outcomes along with suggestions and

recommendations have been presented in the following pages. However at this

stage of the report it is needed to keep the following limitations of the study in

mind.

A sample size of only 50 may or may not elucidate the true picture prevailing

in the population. Hence the results must not be generalized for the whole

population.

It is believed that the respondents have revealed the true views. However any

false details on the part of the respondent will spoil the picture.

Comparison of only two sectors, mutual fund and bank deposits have been

considered while other scope of investment have not been taken into

consideration at all stages of questionnaire as it is beyond the scope of the topic.

The study will reflect the scenario present only in the present economic

scenario which is going through extreme volatile conditions and may change

with the change in market conditions.

The sample chosen are of the above mentioned area and the findings will reflect

the scenario of that area only. It may fail to reflect the picture of other areas

even within New Delhi.

The sample has been chosen from the earning class keeping in view the

requirements of the study. It is all taken into care that the chosen respondents

are aware of the different investment options mentioned in the questionnaire

and hence cannot be generalized for all the employed class.

The analysis has been done on the basis of data as available till April 18, 2009.

There have been recent changes in the market as well as interest rates by the

government.

Page | 58

THE FINDINGS

Q: How do you view present market for investment?

ANALYSIS

As can be easily deciphered from the graph, majority of the sample population

favors investing at the moment. The finding is corroborated by the fact that even

the stock market during the same period had seen huge revival. Stock indices have

been showing positive growth during the same period of the survey. Investors

could see the silver linings. A huge 70% has favored investing into the market at

this juncture. They reasoned as the indices would go up they would get better

returns; prices of the securities are low. The other 22% does not trust the volatile

market conditions, while the rest 8% are not sure of what to do, hence have not put

up any view.

FAVOURABLE70%

UNFAVOURABLE

22%

CANT SAY8%

VIEW ON MARKET

FAVOURABLE UNFAVOURABLE CANT SAY

35 11 4

Page | 59

Q: What percentage of your annual income do you invest?

<35% 35%- 40% 40%-45% 45%-50% 50%-55% 55%-60% 60%-65% >=65%

0% 2% 26% 16% 6% 4% 12% 34%

ANALYSIS

In general there has been increase in the investment with the increase in

income. However if we go by age group there has not been any marked

difference in the share of investment. Only the risk taking ability of the

senior age group decreases.

02468

1012141618

0 0 0 0 0 1

13

8

3 2

6

17

RES

PO

ND

ENTS

PERCENTAGE OF INCOME INVESTED

INVESTMENT SHARE

Page | 60

Figure 1 GRAPH BETWEEN INCOME AND PERCENTAGE OF INCOME INVESTED

Income Groups

1=upto 2 lacs 2=2-4 lacs 3=4-6 lacs

4=6-8 lacs 5=8-10 lacs 6=above 10 lacs

Percent Income Investments Groups

1=35-40% 2=40-45% 3=45-50%

4=50-55% 5=55-60% 6=60-65%

7=65% above

We find using SPSS that majority of respondents have saved between 50%-55% for investment.

The above diagram based on SPSS explains the relationship between income and investment.

income * percent_income_invested Crosstabulation

Count

percent_income_invested

Total

35-40

percent

40-45

percent

45-50

percent

50-55

percent

55-60

percent

60-65

percent

above 65

percent

income 0 to 2 lacs 1 4 0 0 0 0 0 5

2 to 4 lacs 0 9 5 2 3 1 0 20

4 to 6 lacs 0 0 3 0 0 5 4 12

6 to 8 lacs 0 0 0 0 0 0 12 12

8 to 10

lacs

0 0 0 0 0 0 1 1

Total 1 13 8 2 3 6 17 50

Page | 61

Q: Given below are the different sectors for investments. Please assign

points based on your assessments so that the total points add up to 100.

The higher the number allotted to a particular sector the higher its

importance is to you and vice versa. (See appended questionnaire).

ANALYSIS

Indians are averse to risk. Almost all of them have given the bank deposits very

high points. Bank deposits are known to be one of the safest (AAA ranking)

deposits having regular and definite returns. They have easy liquidity and can also

be employed to take loans against it. Hence it has topped the chart. It is succeeded

by insurance. Insurance helps to meet exigencies and is also a shield for the

uncertain future. Although a premium is associated with it people consider it to be

their basic necessity. Moreover a strong force of 12 lakh insurance advisors has

also helped in its promotion. Government securities are again risk free and give

regular and definite yield. Fixed assets such as land and buildings have its value

growing with time. Moreover if properly employed these provide regular yield.

However liquidity takes time. Private securities have the potential to give better

yield than others but association of credit risk makes it dull to investors.

Commodity market except for gold and silver is considered by the investors as the

zone of business class who had adept knowledge on the commodities.

12

34

56

7

INVESTOR'S CHOICE

Page | 62

Q: Given the option to invest in the security market which route would

you follow?

DIRECT TRADING MUTUAL FUND

22 28

ANALYSIS

28 out of 50 that are 56% of the sample would opt for mutual fund given a chance

to invest in security market. The reason they cite is lack of information and time.

Mutual funds are professionally managed by the connoisseurs in this field. Your

investment is booked in pursuit of the best of return. Moreover for small investors

it helps their cause as it gives them an opportunity to invest with even a small sum

of money. Credit also goes to the AMCs who have invested heavily in marketing

the mutual funds and also the 50000 recognized financial advisors who had helped

in the cause. However the other smaller group has a different view. They would

like to invest directly in the market because of the charges associated with mutual

fund. Moreover there is no guarantee that the fund manager would not be partisan

to any company. As in recent years there has also been a surge in small brokers

who would guide the investors, this group is ready to take their help as they claim

that these brokers pay individual attention.

DIRECT TRADING 44%MUTUAL FUND

56%

THE GREAT ENIGMA OF TRADING

Page | 63

Q: Please select one item each from the following pairs, the type of fund

you would prefer to invest in. (see appended questionnaire).

GROWTH FUND INCOME FUND BALANCED FUND

40% 42% 18%

ANALYSIS

Investors look for returns. Hence most of them have preferred to invest in income

funds where they expect to get regular income in form of dividends. Investors are

of the view a bird in hand is better than two in bush. While collecting the same

information during the initial days of the internship as a part of collecting initial

information report the percentage for income fund seekers was higher.

Comparatively this time it has decreased. The rise in seekers of the Growth Fund

may be attributed to the market situations. The NAV of the funds are low and the

market situations are showing positive signs. Under the condition the investors are

expecting to have quick profit making in the market. Balanced funds stand as the

least seek by the investors.

0

5

10

15

20

25

GROWTH FUND INCOME FUND BALANCED FUND

20 21

9RES

PO

ND

ENTS

WHICH FUND TO CHOOSE?

Page | 64

Q: Given below is a list of parameters. Mark on the basis of the

importance you give to these parameters 1 being the most important 7

being the least. (See appended questionnaire).

ANALYSIS

For the investors returns count the most. As every mutual fund has an inherent risk

associated with it they consider returns as the most important point while

evaluating. Closely on the heels are the risk factors. That counts so much because

none of the investors would like to lose their principal amount. Hence most of the

investors prefer income fund as they invest in debentures which are relatively safer

yielding with good returns. However under current market scenario when everyone

is expecting return of the bear run they are ready to let risk take a back seat and

invest in equity based schemes where they expect a higher return. Tax savings is an

important aspect and investors welcome the fact one can gain while saving taxes.

A good rating agency helps the customer to catch hold of a good fund. Portfolio

gives an idea of how the future returns would be. It helps in assessing the risk

return. Though AMCs does not have much to do with the returns their image is

considered while evaluating a fund. Basically it is the brand value that makes an

impact on the investors. A good brand is considered to be transparent, customer

friendly and hence the sixth position. In spite of being the brain the fund managers

have attained the least position because they are not known to the retail investors.

1 2 3 4 5 6 7

POINTS TO PONDER

Page | 65

Q: Have you ever invested in mutual funds?

YES NO

15 35

ANALYSIS

In spite of all the hard work taken by various AMCs, distributors and even the

Government the track record of the participants is not worth boasting. A dismal

4.8% of the household investments in India go into Mutual Funds. Even that is not

ubiquitous in every corner of the country. The top 8 cites of the country account

for 60% of the investment in this field. Hence to no surprise we have only 30% of

the respondents who have earlier invested into mutual funds. To a great extent our

economic structure has been responsible for that. Our economy till recent was a

closed one with government monitor. For every unsecure part in the economy

government was the security. Hence the public still needs time to accustom to

these high risk, high gain papers. In addition the jugglery of words used by the

mutual fund houses for various charges confuses the ordinary people. They find it

difficult to understand and distrust these fund houses. Various risk factors earlier

mentioned also are the factors behind non participation of people in mutual funds.

30%

70%

TRACK RECORD

YES

NO

Page | 66

Q: Given below is a continuous scale from 0 to 100. You have to

indicate the best that describes your choice of investment. If your choice

is equities only against debt than give equities 100%. (See appended

questionnaire).

ANALYSIS

Given a choice to choose between Equity and Debentures the investors are more

inclined towards Debentures. Investors in general risk averse. So in an average an

investor would invest only Rs. 12 out of his Rs 100 he/she has kept aside for

investment. The reason lies in the safe nature of the debentures. However it‟s

worth noting that only 5% of household investments take equity route which if

seen pessimistically speaks of the dismal performance of the sector. But at the

same time the optimistic view interprets it as a great scope for growth of the

mutual fund industry.

20%

15%

24%

21%23%

10%

0%

25%25%

15%

0%

30%

18%

10%

15%

20%

5%5%

0%

12%

7%5%

0%

15%

25%

0%

15%

18%

5%

20%

5%

10%8%

0%

5%

20%

25%

15%

5%

10%

0%

5%

10%

23%

15%

5%

0%

5%5%

22%

0%

5%

10%

15%

20%

25%

30%

35%

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49SERIAL NUMBER OF INVESTORS

PERCENTAGE OF EQUITY

AVERAGE PERCENTAGE OF EQUITY

DEBT88%

EQUITY12%

EQUITY vs. DEBT

Page | 67

Q: Please mark (√) the way you would invest in Mutual Funds.

SIP LUMPSUM BOTH

21 20 9

ANALYSIS

Though very recently introduced by the Franklin Templeton group in the Indian

market, SIP (systematic investment plan) has been gaining huge popularity due to

extreme flexibility regarding payments and its ability to average out the extreme

effects of the market. Moreover in the volatile market conditions SIP acts as the

best way to invest in the market as it is difficult to locate the perfect timings.

However in the recent days as most of the investors are looking optimistic towards

the market and they are expecting the market to have bottomed and the path to

ascent has begun the sentiments are inclined towards lump sum to gain quick

profits. People are ready to take the risk. The few who are still unable to figure out

anything about the market has opted for both as it will help them to diversify the

risk.

42%

40%

18%

THREE FOLD PATH

SIP LUMPSUM BOTH

Page | 68

Q: Mark (√) on the type of deposits you are availing in a bank.

ANALYSIS

Banks have been the favorite ground for the investors as they are credit risk free

and easily liquidated. However from the plethora of investing opportunities even

within a bank I chose a few which the references guided me. Out of these selected

ways within a bank the most popular came out to be the saving account. Though it

gives only a small interest it has been extremely popular because of the numerous

facility it provides such as a debit card which can even be used for online payments

and purchases, cheque facility, etc. Attractive schemes such as money return on

purchases have further popularized it. Hence every one of the respondents has a

saving account. Fixed deposits grabbed the second position because of the steady

and sure yields associated with it. Recurring deposits are popular with the investors

who have a long term vision so that their accumulated amount over a long period

of time gives a good return. But because of many other instruments currently in the

market which are giving better returns it has lost its sheen and is not as popular as

earlier days. Current account is limited to the entrepreneurs who have to go

through a lot of transactions daily. Because of lack of information and huge

minimum balance it is not popular among investors.

19

2

7

50

0

FIXED DEPOSIT

CURRENT ACCOUNT

RECURRING DEPOSIT

SAVING ACCOUNT

CERTIFICATE OF DEPOSITS

NUMBER OF INVESTOR

BANKING ON

Page | 69

Q: Given below is a list of top performers in banking industry. Rank

them against the given parameters. (See appended questionnaire).

ANALYSIS

State Bank of India and Punjab National Bank has been favored for their product

by the respondents. Perhaps being government supported they have been able to

keep products for every class of customers. The private banks are in general are

catering to the urban class only. When prices were taken into consideration the

government banks again scored better than the private ones. Just for example the

minimum balance required for opening a saving account in these government

banks are much lower than in the private banks. Similarly some of the private

banks discourage the customer at office by charging them for every consultation. It

is a known fact that SBI is the most diverse bank in the country with over 10000

branches. It has a presence in almost every corner of the country. In the recent

years even ICICI has been making widespread expansion. The private banks with

the use of modern technology have proved out to be more customers friendly.

1

4 5

2 3

6

PRICE

12

43

56

PLACE

31

2

65

4

SERVICE

1

4 35

2

6

PRODUCT

Page | 70

Q: Rank the following banks that deal in mutual funds too.

UTI heralded Mutual Fund in India. Its modern face Axis bank too has been doing

well. People have an unwavering attitude towards UTI that has helped the Axis

Bank too. Axis bank has helped its UTI mutual fund holders to have hassle free

transfer of money from Axis bank Account to mutual funds. ICICI has gained

popularity due to its wide network and constant innovation in its service. It is the

pioneer to begin online trading which has helped the customers to trade from

home. HDFC has a repo with its customer by delivering customize services. One of

the largest fund houses in the country it has left no stone unturned to woo its

customer. State Bank of India is a classic in the banking sector. Being the largest

public sector bank has helped it reach to every section of people. One of the most

trusted names it was no surprise that the bank could easily make a mark among its

mutual fund seekers. The world‟s local Bank has presence among all the major

cities of the country. It has created a niche in upper middle and the rich class by

serving them adeptly. Deutsche and Kotak Mahindra are comparatively newer face

and still have to go a lot. There are a lot of expectations because of the brand they

represent.

1 2 3 4 5 6 7 8

UTI/AXIS ICICI HDFC SBI HSBC ING DEUTSCHE KOTAK MAHINDRA

TOP BANKS DEALING IN MUTUAL FUNDS

Page | 71

SUGGESTIONS AND RECOMMENDATIONS

Customer Care for general query handle

Customers want to solve his or her problem at the moment it arises. Our

relationship manager many times don‟t have that much time to discuss all that

details on phone, they may sometime get busy with the meeting with client. So for

general query handle as well as to listen to the grievances we can have a separate

section.

Provision for training of the new investors

The investors are often confused with the jargons used in the financial world and

it leads to a lot of confusion and suspicions. The company may provide a kit to its

first time investors to equip them of these jargons. This can also be provided on the

company‟s website.

Toll Free Number

A toll free number will go a long way in saving the time of the customers as well

the company‟s workforce. Even an interactive voice response system would be

helpful in meeting a lot of queries of the investors.

Appointment of more Relationship managers

There should be more appointments Relationship Managers so that every customer

gets equal attention.

Provision of online access to the customer account

There must be provision that the investors can get online access to his/her account.

This will help the customers in getting real time data. Moreover the company may

also use it for promotion of schemes.

Page | 72

Note:

The recommendations which I have listed here above are strictly based on

the knowledge of the securities market that I have acquired during my

training of 14 weeks duration.

All the recommendations are for the improvement in the functioning of the

front end operations of the Mahindra and Mahindra Financial Services

Limited.

The recommendations are purely based on the problems that I had faced as a

Management Trainee.

CONCLUSION

These fourteen weeks of training had been immensely useful in not only gaining

the theoretical but some of the first hand practical experience that needs to be

elaborated in the context. Some of the harsh but true findings are that –

Most of the investors go by market sentiments and are ignorant about the

techniques to choose the right fund and often end up on the wrong boat.

It is extremely difficult to predict the market condition. Figures need not

always represent the true pictures. The same funds that have been doing too

badly in the last few weeks have given exactly opposite returns. The same

again should not be taken as the benchmark. Mutual Funds are subject to

market risk.

Even the financial advisors should not be altogether trusted as they often

mislead the investors in quest of their commissions. One must do the

homework before investment.

Page | 73

REFERENCES

INTERNET SOURCES

www.investopedia.com

www.rbi.gov.in

www.moneycontrol.com

www.amfiindia.com

www.mutualfundsindia.com

www.nseindia.org

TEXTS

Money Banking by M.L.Seth

Money and Banking by Y.P.Verma

Banking Law and practice by P.N.Varshney

Principles of Banking by Indian Institute of Banking and Finance

Basic of Investing in Stock Markets by Ashish Choraria.

A Layman Guide to Mutual Fund by the Outlook Money.

http://www.investopedia.com/

http://www.rbi.gov.in/

http://www.moneycontrol.com/

http://www.amfiindia.com/

http://www.mutualfundsindia.com/

http://www.nseindia.org/

Page | 74

GLOSSARY

ASSET MANAGEMENT COMPANY (AMC) - The legal entity set up by

mutual fund to handle its operation. For example, Templeton Asset

management (India) Pvt. Ltd runs Templeton mutual fund.

BETA - A risk measure that determine the sensitivity of an asset return to

change in the return from the market portfolio.

STANDARD DEVIATION-Measure of the volatility of the scheme return.

BEAR MARKET-It is a period in market when investors are on a selling

spree and the share prices are going down.

BULL MARKET-Period during which the prices of stocks in the stock

market keep continuously rising for a significant period of time on the back

of sustained demand for the stocks.

BSE-INDEX- An index reflecting the stock prices of 30 companies listed on

the Bombay Stock Exchange (BSE) which is taken to be representative of

the stock market movement. It is usually considered as the benchmark for

performance evaluation of equity funds.

MONEY MARKET-It refers to a market for very short-term securities.

LOCK IN PERIOD-The period after investment in fresh units during

which the investor cannot redeem the units.

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A study on Mutual Funds vis a vis Bank Deposits

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