Final Report for NJ(Arup Chakraborti)

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A SUMMER PROJECT REPORT ON

Performance Analysis of

Different Mutual funds

Offered in India A Project report submitted in partial fulfillment of the requirement of

Master in Business Administration

Faculty of Management Studies

(MBA-1st year 2008-2010)

FOR

NJ INDIAINVEST PVT. LTD., BARODA

BY

ARUP CHAKRABORTI

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ACKNOWLEDGEMENT

I take this opportunity to express my gratitude to all the people who have guided and helped me directly

or indirectly in the course of completion of my project.

The whole summer internship period with NJ INDIAINVEST has been full of learning and sense of

contribution towards the organization. I would like to thank NJ INDIAINVEST for giving me the

opportunity of learning and contributing through this project.

A successful project can never be prepared by the single efforts of the person to whom project is

assigned, but it also demand the help and guardianship of some conversant person who helped the

undersigned actively or passively in the completion of successful project.

I would first of all like to express my gratitude to Mr. Tushar Shastri for assigning me such a worthwhile

topic Performance Analysis of Different Mutual funds offered in India to work upon in

NJ INDIAINVEST, Baroda.

I am also thankful to my faculties Prof. Dr. G. C. Maheshwari and Dr. Surendra Sundararajan for their

valuable input in the topic. The project couldnt have been complete without the help of Mr. Durgesh

Pandiya and Mr. Ronak Thakkar of Smart Link Capital (Fund partner of NJ Indiainvest).

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CERTIFICATE

This is to certify that Mr. Arup Chakraborti a student of Faculty of Management Studies, M. S.

University of Baroda has completed project work on Performance Analysis of Different Mutual

funds offered in India under my guidance and supervision. He has successfully completed his

summer internship with NJ IndiaInvest.

I certify that this is an original work and has not been copied from any source.

Signature of Guide

Name of Project Guide - Mr. Tushar Shastri

Date-

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TABLE OF CONTENTS

Sr. No. Particulars Page No.

1 Acknowledgement 1

2 Certificate 2

3 Executive summary 4

4 Introduction to Mutual Funds 6

5 Mutual Funds Industry Phases 27

6 Company Profile 30

7 Performance Analysis 37

8 Research Methodology 42

9 Data Analysis and Interpretation 52

10 Limitations of the study 61

11 Suggestions and Recommendations 62

12 Bibliography 63

13 Annexure 64

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EXECUTIVE SUMMARY

The economy is highly influenced by the Financial System of the country. The Indian Financial

System has been broadly divided into two segments: the organized and unorganized. An

investor has a wide array of investment avenues available. Economic well being in the long run

depends significantly on how wise he invests.

In present financial scenario where the economy is poised to grow at 6% ,as stated by

our finance minister Mr. Pranab Mukharjee, and the present bulls run in the capital market

,where lot of money is being pumped into the economy by FII, and increasing disposable

income with the generation next has created a problem of investment because there is lots

money on hand but they do not know where to invest as there is no attractive return in the

bank FD, PPF, KVP, NSC, MIS, and other Post saving scheme. Due to uncertainty in share market

and low returns due to low interest rate has left investors puzzled, i.e. to spend the money or

save the money. If they want to save money, how they can save it. So they can get better return

with flexibility, tax benefit and as well as capital appreciation. So it is necessary for investor to

find the answer and way of capital growth with better return rather than uncertain share

market and other low yield investment avenues.

All investments involve risk in varying degrees, and hence it is necessary to understand

risk profile of each investment avenues and know how it can affect your investments. There

should be tradeoff between risk and return. There are also risks that are not in our control like

inflation risk, credit risk, risk of sudden rise in oil prices, risk pertaining to political environment

for instance. In present financial system, investment has lost their potential to earn additional

income, which can help for growth of their capital because the interest return which varies

from approx 4% to 9% and the inflation rate hovering in and around 3%-6% so the real return is

varying between 1% to 3% so this is the real return what a investor gets by investing in FIXED

DEPOSIT, GOVERNMENT SECURITY ,KVP,NSC,PPF,MIS and also blocking their money for min of

2-5 years ,in these instruments ,which is not very encouraging for an investor to invest in these

instruments. So the investor is likely to spend his earnings than invest (save), which what is

happening in our country.

Mutual fund is indeed of great benefit in this respect. They provide the services of

experienced and skilled professionals who determine this risk and monitor them on a going

basis and they are also backed up by research, done by individual Asset Management Company

(AMC) based on the fund objectives.

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When investors are confronted with an outstanding range of products, form traditional bank

deposits to downright shady money-multiples schemes, it has to be judged on the yardsticks of returns,

liquidity, safety, convenience and tax efficiency. An important question faced by many investors across

the country today is whether one should invest in a bank fixed deposit or in a debt-oriented Mutual

Fund. Mutual fund gives an opportunity to select from different investment options ranging from liquid

funds to diversified equity, based on their clients appetite for risk and the return they want.

During the training period and interaction with people it was found that awareness of

Mutual Fund among investors was there to a limited extent but there was lot of misconceptions

among them about mutual fund as I had meet few who had lost their money due to wrong

investment style, period of investment as well as fear of losing money during slowdown. On the

whole if I have to conclude my study I would like to say that if we have to make mutual fund as

good investment option, we need to make the investors understand about the nature and style

of benefits derived from mutual funds.

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Introduction

To

Mutual Funds

Introduction to Mutual Funds

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

financial goal. The money thus collected is then invested in capital market instruments such

as shares, debentures and other securities. The income earned through these investments

and the capital appreciations realized are shared by its unit holders in pr

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.

A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI)

that pools up the money from individual/corporate investors and invests the same on behalf of the

investors/unit holders, in Equity shares, Government securities, Bonds, Call Money Markets etc, and

distributes the profits. In the other words, a Mutual Fund allows investors to indirectly take a position

in a basket of assets.

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

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

securities are spread among a wide cross

Diversification reduces the risk because all stocks may not move in the same direction in the same

proportion at same time. Investors of mutual funds are known as unit holders.





and the capital appreciations realized are shared by its unit holders in pr



basket of securities at a relatively low cost.

t below describes broadly the working of a Mutual Fund.





m for pooling the resources by issuing units to the investors and investing


securities are spread among a wide cross-section of industries and sectors thus the


proportion at same time. Investors of mutual funds are known as unit holders.

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and the capital appreciations realized are shared by its unit holders in proportion to the







m for pooling the resources by issuing units to the investors and investing


section of industries and sectors thus the risk is reduced.


The investors in proportion to their investments share the pr

normally come out with a number of schemes with different investment objectives which are

launched from time to time. A Mutual Fund is required to be registered with Securities Exchange

Board of India (SEBI) which regulate

IMPORTANT CHARACTERISTICS OF A MUTUAL FUND

A Mutual Fund actually belongs to the investors who have pooled their Funds. The ownership

of the mutual fund is in the hands of the Investors.

A Mutual Fund is managed by investment professional and other Service providers, who

a fee for their services, from the funds.

The pool of Funds is invested in a portfolio of marketable investments.

The value of the portfolio is updated every day.

The investors share in the fund is denominated by units. The value of the units changes

with change in the portfolio value, every day. The value of one unit of investment is called

asset value (NAV).

The investment portfolio of the mutual fund is created

objectives of the Fund.

ORGANISATION OF A MUTUAL FUND:

There are many entities involved and the diagram below illustrates the organizational set up

of a Mutual Fund:

(For detailed definitions in the above chart refer

The investors in proportion to their investments share the profits or losses. The mutual funds



Board of India (SEBI) which regulates securities markets before it can collect funds from the public.

IMPORTANT CHARACTERISTICS OF A MUTUAL FUND


of the mutual fund is in the hands of the Investors.

utual Fund is managed by investment professional and other Service providers, who

a fee for their services, from the funds.


The value of the portfolio is updated every day.

nvestors share in the fund is denominated by units. The value of the units changes

with change in the portfolio value, every day. The value of one unit of investment is called

The investment portfolio of the mutual fund is created according to

ORGANISATION OF A MUTUAL FUND:


(For detailed definitions in the above chart refer to annexure 1)

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ofits or losses. The mutual funds



s securities markets before it can collect funds from the public.


utual Fund is managed by investment professional and other Service providers, who earn


nvestors share in the fund is denominated by units. The value of the units changes

with change in the portfolio value, every day. The value of one unit of investment is called net

according to the stated Investment


to annexure 1)

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Mutual Funds diversify their risk by holding a portfolio of instead of only one asset. This is because by

holding all your money in just one asset, the entire fortunes of your portfolio depend on this one

asset. By creating a portfolio of a variety of assets, this risk is substantially reduced.

Mutual Fund investments are not totally risk free. In fact, investing in Mutual Funds contains the same

risk as investing in the markets, the only difference being that due to professional management of

funds the controllable risks are substantially reduced. A very important risk involved in Mutual Fund

investments is the market risk. However, the company specific risks are largely eliminated due to

professional fund management.

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STRUCTURE OF A MUTUAL FUND

Investor profile:

An investor normally prioritizes his investment needs before undertaking an investment. Different

goal will be allocated to different proportions of the total 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.

Sponsor

Mutual fund Trustees

ASSET MANAGEMENT COMPANY

Custodian Registrar

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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.

Organization 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 managers or The merchant-banking unit

Custodians.

Mutual Fund Trust:-

Mutual fund trust is created by the sponsors under the Indian trust act, 1982 .This 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 SEBIs approval and authorization to these schemes.

Marketing the schemes for public subscription.

Seeking RBI approval in case NRIs 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 Asset Management Company:

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 charge ranges from 0.15% to 0.20% on the net value of the customers 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 Custodians:

Safe custody

Trade settlement

Corporate action

Transfer agents

Rate of return on Mutual Fund:

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. AMCs shall have a minimum Net worth of Rs. 5 crores;

3. AMCs 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, whichever 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, whichever 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 companys 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 companys 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 oversee 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.

Types of Mutual Fund Schemes:

The various types of Mutual Funds can be classified according to various investors

objectives and their expectations. They can be segregated as under into the following criteria.

By Investment Objectives.

By Duration/Constitution.

Load and No-Load Funds.

Other types of schemes.

Hereby, let us discuss the various types of Mutual Funds in detail.

1. By Investment Objectives

Growth/Equity Funds

These funds are high risk-high return funds, wherein major chunk of investment goes in equity

shares of companies. The NAV of such funds keep fluctuating, but the potential to earn in such funds is

higher provided they are invested with long-term (at least 5 years) financial goals. The leading examples

of such funds are, Kothari Pioneer Prima Fund, Prudential ICICI Equity Fund, Birla Sun Life Fund, etc.

Income/ Debt Funds

These funds are low risk-low return funds, wherein the investments are made in income bearing

instruments such as bonds, debentures, government securities, commercial papers etc. The share prices

of these funds tend to be more stable in value and are best suitable for regular income investment

goals, provided minimum investment period is more than one year. The leading examples are monthly

income funds of UTI, Prudential ICICI Income Plan, JM Income, Alliance Liquid Fund etc.

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Balanced Funds

These funds invest in both, equity shares and income bearing instruments. The idea is to reduce

volatility of fund, while providing some upside for capital appreciation. In all, it is a combination of

income and growth funds. It involves more return more risk than income funds and less return less

risk than equity funds. They are best suited for people looking for a combination for capital appreciation

and regular income and best time span for such investments is more than 3 years. The examples are

PRUICICI Balanced Fund, IDBI-PRINCIPAL Balanced Fund, and IDBI-PRINCIPAL Child Benefit Fund etc.

Money Market Funds

These funds invest in highly liquid instruments such as certificate of deposits and short-term

bonds. They have emerged as an alternative for savings and short-term fixed deposit accounts. They

are best suited for capital preservation investment objectives, where time-span is least.

Gilt Funds

These funds are sort of government funds wherein the investments are made in debt

instruments of the government, which carry no risk of non-payment of interest as the RBI manages the

payment of interest and principal on the instruments. These funds are best suited to the regular income

and long-term investment objectives. The time-span matters a lot as there are chances of price

volatility, which may lead to possibility of loss of principal invested, if invested for short-term. Examples

are PRUICICI Gilt Fund, IDBI-PRINCIPAL Government Securities Fund etc.

International Funds

These are funds investing in international assets or shares of emerging market origin. These are

not possible in India due to regulation against investing overseas. Most of the foreign institutional

investors (FIIs) investing in India are actually funds of this type.

2. By Duration/By Constitution

Open ended Funds

These funds are open for subscription and redemption every day at prices linked to the daily net

asset value per share. That means buying and selling is done directly with the fund. From the investors

perspective, these funds are more liquid compared to the close-ended funds. The key features of such

funds are there in fixed maturity, the corpus keeps on fluctuating and they are typically not listed in any

stock exchange.

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Close ended Funds

The investment in such funds is made during the initial issue period and the money gets lock-in

for a stipulated period (ranging from 2 to 15 years). After the initial issue, these funds can be bought or

sold on the stock exchange where the fund is listed. Generally, the close-ended funds are traded at a

discount to their NAV. Its key features are the maturity is fixed, the corpus is also fixed and they are

listed in stock exchange.

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.

3. By Entry/Exit Charges

Load Funds

Load funds are those funds wherein the investor has to incur a one-time charge at the time of

either entry or exit into the fund. The entry charge is called front end load, whereas the exit charge is

called back end load. This load is limited to a maximum of 6% of the investment value.

No load Funds

No load funds are those wherein the investor has to incur charges on every transaction made

by him, but then the investor is free from entry or exit fee as in the case of load funds. Here the AMC is

entitled to collect 1% additional management fees (this fee is less than load funds but then the

transaction made will be higher, so the actual amount incurred will be nearly similar). Thus, while the

investor saves some upfront cost, he incurs high ongoing cost.

Assured return scheme

Assured return schemes are those schemes that assure a specific return to the unit holders

irrespective of performance of the scheme. A scheme cannot promise returns unless such returns are

fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document.

Investors should carefully read the offer document whether return is assured for the entire period of the

scheme or only for a certain period. Some schemes assure returns one year at a time and they review

and change it at the beginning of the next year.

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Other Types of Schemes

Tax Saving Funds

These funds offer tax rebate to the investor along wit capital growth and steady returns. An

Equity United Savings Scheme is available wherein investments are made primarily in stocks. The

investment can be made any time, but it gets lock-in for a period of 3 years and in return tax rebate @

20% is obtained if investments exceed Rs.1, 00,000. Another such scheme is pension scheme, wherein

tax rebate @ 20% can be obtained for investment up to Rs.60, 000.

Index Funds

Index funds invest only in stocks of a particular index such as BSE, S&P CNX 500 etc. The

principle is to duplicate performance of these widely followed indexes while keeping trading and other

costs to a minimum. The returns in case of such funds depend on the indexs performance. It is best

suited to the investors who are satisfied with the returns of an index.

Sector Funds

Sector funds primarily invest in companies of a particular sector/ industry such as information

technology, pharmaceuticals, FMCGs etc. These types of funds are subject to more risk as the

performance of funds depends on the performance of the industry as a whole and also because the

diversification of risk is reduced. Also with the new rule of government not allowing investing more

than 10% in a particular company, is a big problem as the number of companies is not very large and at

the same time all of them are not very successful. It is best suited to people willing to take high risk.

Special Purpose Funds

Special purpose funds are those funds that target a specific customer segments, such as

children, women, retired people etc. Making their fund oriented towards the need of the group

they are targeting.

Off Shore Funds

These funds will have non-residential investors and are regulated by the provision of the foreign

countries where they are registered. Further these funds are governed by the rules and procedures laid

down for the purpose of approving and monitoring their performance by the department of economic

affairs, Ministry of Finance and the directions of RBI.

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Mutual Fund investment strategy:

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.

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Cost involved in Mutual Funds:

An investor must know that there are certain costs involved while investing in mutual funds.

Operating expenses:

These refer to cost incurred to operate a mutual fund. Advisory fee is paid to investment managers,

audit fees to charted accountant, custodial fees, register and transfer agent fees, trustee fees, agent

commission. Operating expenses also known as expenses ratio which is annual expenses expressed as a

percentage of these expenses is required to be reported in the schemes offer document or prospectus.

Expenses ratio=

For instance, if funds Rs. 100 crores and expenses Rs. 20 lakhs. Then expenses ratio is 2% expenses ratio

is available in the offer document and fro historical per unit statistics included in the financial results of

the fund which are published by annually, un audited for the half year ending September 30th and

audited for the physically year end 1st March 30th .

Depending upon scheme and net asset, operating expenses are determined by limits mandated by SEBI

mutual funds regulation act. Any excess over specified limits as to born by Management Company, the

trustees or sponsors.

Sales charges:

These are known commonly sale loads, these are charged directly to investor. Sales loads are used by

mutual fund for the payment of agents commission, distribution and marketing expenses. These

charges have no effect on the performance of the scheme. Sales loads are usually expression

percentage and or of two types front-end and back-end.

Front end load:

It is a onetime fixed fee paid by an investor when buying a Mutual funds scheme. It determines public

offer price which intern decides how much of your initial investment actually get invested the standard

practice of arriving a public offer price is as follows.

Operating expenses

Average net assets

Net asset value

(1-front end load)

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Public offer price=

Let us assume, an investor invests Rs. 10,000 in a scheme that charges it 2% front end load at a NAV per

unit Rs. 10 using the formula public offer price = 10/(1-0.02) is Rs. 10,20. So only 980 units are allowed

to the investor.

Number of units allotted=

10,000/10, 20= 980 units at a NAV of Rs. 10.This means units worth 9800 are allotted to him an initial

investment Rs.10, 000 front end loads tend to decrease as initial investment amount increase.

Back end load:

May be fixed fee redemption or a contingent differed sales charged a redemption so load continues so

long as the redeeming or selling of the units of a fund does not take place in the event of a back end

load is applied. The redemption price is arrive or using following formula.

Redemption price =

Let us assume an investor redeems units valued at Rs. 10,000 in a scheme that charges a 2% back, end

load at a NAV per units of Rs. 10 using the formula Redemption price 10/(1+0.02)= Rs. 9.8 s, what the

investor gets in hand is 9800(9.8*1000).

Contingent differ sale charges (CDSC):

Contingent differed sales charges of a structured back end load. It is paid when the units are reading

during the initial years of ownership. It is for a predetermined period only and reduced over the time

you invested for a fund. The longer an investor remains in a fund the lower the CDSC.

The SEBI stipulate the a CDSC may be charge only for first four years after purchase of units and also

stipulate the maximum CDSC that can we charge every year. This is the SEBI mutual funds regulations

1996 do not allow either the front end load or back end load to any combination is higher than 7%.

Transaction cost:

Amount invested

Public offer price

Net asset value

(1+back end load)

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Some funds may also impose a switch over fee which is charge on transfer of investment from one

scheme to another within a same mutual funds family and also to switch from one plan to another

within same scheme. The real estate mutual funds sector is now being considered as the engine of

economic growth.

Benefits of Investing In Mutual Funds

Professional Management:

Mutual Funds provide the services of experienced and skilled professionals, backed by a dedicated

investment research team that analyses the performance and prospects of companies and selects

suitable investments to achieve the objectives of the scheme.

Diversification:

Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors.

This diversification reduces the risk because seldom do all stocks decline at the same time and in the

same proportion. You achieve this diversification through a Mutual Fund with far less money than you

can do on your own.

Convenient Administration:

Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad

deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save your time

and make investing easy and convenient.

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Return Potential:

Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest

in a diversified basket of selected securities.

Low Costs:

Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital

markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs

for investors.

Liquidity: In open-end schemes, the investor gets the money back promptly at net asset value related prices from

the Mutual Fund. In closed-end schemes, the units can be sold on a stock exchange at the prevailing

market price or the investor can avail of the facility of direct repurchase at NAV related prices by the

Mutual Fund.

Transparency:

investors get regular information on the value of investment in addition to disclosure on the specific

investments made by their scheme, the proportion invested in each class of assets and the fund

manager's investment strategy and outlook.

Flexibility:

Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment

plans, you can systematically invest or withdraw funds according to your needs and convenience.

Affordability:

Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund because of

its large corpus allows even a small investor to take the benefit of its investment strategy.

Choice of Schemes:

Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

Well Regulated:

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.

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Limitations of Mutual Fund

Waiting time before investment:

It takes time for a Mutual Fund to invest money. Since it is difficult to invest all funds in one day, there is

dome money waiting to be invested. Further, there may be a time lag before investment opportunities are

identified. This ensures that the fund under performs the index. For open-ended funds, there is the added

problem of perpetually keeping some money in liquid assets to meet redemption. The problem of

impracticability of quick investments is likely to be reduced to some extent with the introduction of index

futures.

Fund management costs:

The costs of the fund management process are deducted from the fund. This includes marketing and initial

costs deducted at the time of entry itself, called load. Then there is the annual asset management fee and

expenses, together called the expense ratio. Usually, the former is not counted while measuring

performance, while the later is. A standard 2% expense ratio means that, everything else being equal, the

Fund manager under performs the benchmark index by an equal amount.

Cost of churning:

The portfolio of a fund does not remain constant. The extent to which the portfolio changes, it is a function

of the style of the individual fund manager. It is also dependent on the volatility of the fund size i.e. whether

the fund constantly receives fresh subscriptions and redemption. Such portfolio changes have associated

costs of brokerage, custody fees, and registration fees etc. that lowers the portfolio return commensurately.

Change of index composition:

The indices keep changing over the world to reflect changing market conditions. There is an inherent

survivorship bias in this process, with the bad stocks weeded out and replaced by emerging blue chips. This is

a severe problem in India with the Sensex having been changes twice in the last five years, with each change

being quite substantial. Another reasons for change index composition is Mergers & Acquisitions. The

weighting of the shares of a particular company in the index changes if it acquires a large company not a part

of the index.

Tendency to take conformist decisions:

From the above points, it is quite clear that the only way a fund can beat the index is through investment of

some part of its portfolio in some shares where it gets excellent returns, much more than the index. This will

pull up the overall average return. In order to obtain such exceptional returns, the fund manager has to take

a strong view and invest in some uncommon or unfenced investment options. Most people are unwilling to

do that. They follow the principle No fund manager ever got fired for investing in Hindustan Lever i.e. if

something goes wrong with an unusual investment, the fund manager will be questioned but if anything goes

wrong with the blue chip, then you can always blame it on the environment or uncontrollable Factors

knowing, that there are many other fund managers who have made the same decision.

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Challenges in Mutual Fund Industry

Today, the Mutual Funds have become the most favored investment vehicle across the world. As in the

history of the Indian financial system, the stock markets had not performed well and the interest rates also

stayed depressed, due to which even the Mutual Funds could not do well. So earlier was the scenario where

people did not preferred Mutual Funds and the only industry that came to their minds while investing was

the banking sector. But now the trends are changing and the investors are making their investments the

most in the Mutual Funds industry.

Today, the Mutual Funds industry is of about $18 19 billion. Right now it is very small with barely 11% of the

net demand. But the scope of its development is very high, with the changing trends of more popularity of

the Mutual Funds. There are certain challenges relating to the Mutual Funds industry which are discussed as

follows:

Customer Perspective:

Today the customer profile is changing as they are more educated and are aware of whats happening in the

markets. They want to invest only in those schemes where they know where the money is going. Apart from

this they want fair amount of returns with moderate risk or rather low risk. And considering to these needs,

it can be easily noted that Mutual Fund fulfills these expectations of the customers, where their operations

are pretty transparent and also wide range of schemes are available for different investment objectives (right

from high risk takers to no risk takers). Earlier Mutual Fund meant high risk because of improper

knowledge of Mutual Funds, but today even this issue is taken care of and customers are satisfied with the

performance of Mutual Funds which has made this instrument a hot spot.

Increasing Number of Players:

Earlier was the scenario where only one player, UTI was operating the Mutual Funds. Later the market got

monopolistic, where only few giants operated in the market. This scenario continued for nearly 35 years.

But now, large number of players has entered into this market, coming up with better schemes, better

services and superior performance. Today services like redemption of units within 48 hours, toll-free

telephone nos., cheque writing facility against Mutual Fund account, ATM cards and switching between two

accounts have been reduced for high customer satisfaction. (And continuation to this scenario it wont take

long when the transactions will take place on the Internet, with more customized services.)

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RISKS ASSOCIATED WITH MUTUAL FUNDS

Investing in Mutual Funds, as with any security, does not come without risk. One of the most basic

economic principles is that risk and reward are directly correlated. In other words, the greater the

potential risk the greater the potential return. The types of risk commonly associated with Mutual

Funds are:

1) Market Risk:

Market risk relates to the market value of a security in the future. Market prices fluctuate and are

susceptible to economic and financial trends, supply and demand, and many other factors that cannot

be precisely predicted or controlled.

2) Political Risk:

Changes in the tax laws, trade regulations, administered prices, etc are some of the many political

factors that create market risk. Although collectively, as citizens, we have indirect control through the

power of our vote individually, as investors, we have virtually no control.

3) Inflation Risk

Interest rate risk relates to future changes in interest rates. For instance, if an investor invests in a

long-term debt Mutual Fund scheme and interest rates increase, the NAV of the scheme will fall

because the scheme will be end up holding debt offering lower interest rates.

4) Business Risk:

Business risk is the uncertainty concerning the future existence, stability, and profitability of the issuer

of the security. Business risk is inherent in all business ventures. The future financial stability of a

company cannot be predicted or guaranteed, nor can the price of its securities. Adverse changes in

business circumstances will reduce the market price of the companys equity resulting in

proportionate fall in the NAV of the Mutual Fund scheme, which has invested in the equity of such a

company.

5) Economic Risk:

Economic risk involves uncertainty in the economy, which, in turn, can have an adverse effect on a

companys business. For instance, if monsoons fail in a year, equity stocks of agriculture-based

companies will fall and NAVs of Mutual Funds, which have invested in such stocks, will fall

proportionately.

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Mutual fund

industry in phases

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Mutual fund industry in phases

The Mutual Fund industry in India started in 1963 with the formation of Unit Trust of India, at the

initiative of the Government of India and Reserve Bank of India. The History of Mutual Funds in India

can be broadly divided into four distinct phases.

GROWTH IN ASSETS UNDER MANAGEMENT:

First Phase (1964-87)

Unit Trust of India (UTI) was established on 1963 by an act of parliament. It was set up by Reserve

Bank of India and functioned under the regulatory and administrative control of the Reserve Bank of

India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took

over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was

Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under management.

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Second Phase- 1987-1993(Entry of Public Sector Funds)

1987 marked the entry of non-UTI, Public Sector Mutual Funds set up by Public Sector Banks and Life

Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual

Fund was the first non -UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund

(Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of

India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its Mutual Fund in June 1989

while GIC had set up its Mutual Fund in June 1989 while GIC had set up its Mutual Fund in December

1990.At the end of 1993, the Mutual Fund industry had assets under management of Rs.47, 004

crores.

Third Phase-1993-2003 (Entry of Private Sector funds)

With the entry of private sector funds in 1993, a new era started in the Indian Mutual Fund industry,

giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first

Mutual Fund Regulations came into being, under which all Mutual Funds, except UTI were to be

registered and governed. The erstwhile Kothari pioneer (now merged with UTI were to be registered

and governed. The erstwhile Kothari pioneer (now merged with Franklin Templeton) was the first

Private Sector Mutual Fund registered in July 1993.

The 1993 SEBI (Mutual Fund) regulations were substituted by a more comprehensive and revised

Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund)

regulations 1996.

The number of Mutual Fund houses went on increasing, with many foreign Mutual Funds setting up

funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of

January 2003, there were 33 Mutual Funds with total assets of Rs.1, 21,805 Crores. The Unit Trust of

India with Rs.44, 541 crores of assets under management was way ahead of other Mutual Funds.

Fourth Phase (since February 2003)

In February 2003, following are the repeal of the Unit Trust of India Act 1963. UTI was bifurcated into

two separate entities. One is the specified Undertaking of the Unit Trust of India with assets under

management of Rs.29, 835 crores as at the end of January 2003, representing broadly, the assets of

US 64 scheme, assured return and certain other schemes. The specified Undertaking of Unit Trust of

India, functioning under an administrator and under the rules framed by Government of India and

does not come under the purview of the Mutual Fund Regulations.

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The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI

and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile.

UTI which had in March 2000 more than Rs. 76,000crores of assets under management and with the

setting up of a UTI Mutual Fund, confirming to the SEBI Mutual Fund Regulations, and with recent

mergers taking place among different private sector funds, the Mutual Fund industry has entered its

current phase of consolidation and growth. As at the end of March - 2009, there were 33 funds, which

manage assets of Rs.4, 17,300 crores under 386 schemes.

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Company Profile

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NJ IndiaInvest Pvt. Ltd.

Two dynamic young men after completing their education were about to start their career when

they saw the growing scope of the financial service sector. Both of them decided to jump into the same

field and came out with the dynamic concept of NJ Capitalstock now, which is known as NJ IndiaInvest.

The word NJ stands for the first letter of Neeraj Choksi and Jignesh Desai the founder directors of NJ

IndiaInvest.

This business was started in the year 1994; it was the period when private company was entering

the field of financial services. This is the time when NJ IndiaInvest evolved out as a client focused need

based investment advisory firm. NJ has achieved expertise in need base investment of clients.

NJ has a very well trained men power to meet the need of the clients and market. With the help

of which the organization has achieved growth in past, is growing and will be growing in future. At NJ we

regard mutual fund as one of the best investment avenue available to satisfy any kind of investment

need. With a very well qualified work force we have gained expertise in analyzing mutual fund schemes,

and in-depth study on various parameters is carried out on a regular basis.

NJ IndiaInvest is a company, which is involved in this business from past 15 years as a client

focused need based investment advisory firm. It has developed its own IT Industry known as Finlogic

India Pvt. Ltd. i.e. technology to support for client as well as its employees in their daily routine work.

There is a very qualified staff for IT who has prepared a website for the organization known as

www.njindiainvest.com which provides a valuable support to clients as well as to the employees in

working. All the valuable information is available on our above mentioned web site.

NJ IndiaInvest is a modern concept organization that was growing in past, growing in present

and will be growing in future.

NJ IndiaInvest Process:

The sole business of the organization is to manage clients investments and to fulfill their need

from cap-a-pie. At NJ the people are education centric, the relationship managers will help you in

identifying and understanding your need and help you develop a portfolio across different asset classes

commensurate to your needs. This practice is only performed at NJ and this is what makes it superior to

other competition in this same field.

There are well-trained experts who will give a feel on the various asset classes and explain you the

risk associated with each in a simple and lucid manner to put you at calm. Once the investment is

planned and done we dont leave our client in between, but we back them by periodic valuation reports

and regular relevant information through newsletters, mailers, e-mail, road shows etc.

The prime concern of the people at NJ will be to help you attain peace of mind on the

investment front.

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Services provided to valuable Clients & Agents:

Dedicated portfolio planning & restructuring on demand

The Weekly Performance Sheet (it covers performance of leading mutual fund schemes)

The Monthly Fund Fact Sheet (it covers comprehensive analysis of various mutual funds)

Various Subscription services via e-mail

Sharing relevant information related to the Indian Investment world.

Over and all we also provide net-based services to our clients and agents. Our e-services

are powered by a comprehensive website http:/www.njindiainvest.com. It covers detailed

information about the Mutual industry, it passes various financial planners to satisfy investment

goals like retirement planning, childs marriage planning etc, it also posses various analytical

tools to measure the performance of Mutual Fund schemes viz. Returns Calculators, SIP Returns

Calculator, and many others.

There is a separate desk for the clients to get their portfolio information on fingertips.

THE CLIENT DESK @ njindiainvest.com

Transaction Summary Report (Mutual Funds, fixed Deposits, RBI Bonds & others)

Portfolio Valuation Report

Portfolio performance Report

Profit & Loss Account (FY wise)

Consolidated sector & stock profile for equity investments through mutual funds

Consolidated rating & script profile across debt funds through mutual funds.

Consolidate Asset Allocation Report Across various Assets

Alert processing facility across different parameters

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Philosophy at NJ IndiaInvest:

To provide reliable information

To honor our service commitments

To maintain all records in privacy

To preserve client capital

To provide appropriate feedback

To guide their future investment

To restructure investment plan on demand

Finally to provide complete solution & peace of mind on the investment front.

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AMCs with NJ IndiaInvest:

Alliance Capital Mutual Fund

Birla Mutual Fund

Cholamandalam Cazenove Mutual Fund

DSP Merrill Lynch Mutual Fund

Dundee Mutual Fund

Escorts Mutual Fund

First India Mutual Fund

Franklin Templeton Mutual Fund

Pioneer ITI

HDFC Mutual Fund

HSBC Mutual Fund

IDBI Principal

IL & FS Mutual Fund

ING Savings Trust

JM Mutual Fund

LIC Mutual Fund

Prudential ICICI Mutual Fund

Reliance Mutual Fund

SBI Mutual

Standard Chartered Mutual Fund

Sun F&C Mutual Fund

Sundaram Mutual Fund

Tata Mutual

Unit Trust Of India

Zurich India Mutual Fund

IL & FS Mutual Fund

Prudential ICICI Mutual Fund

Reliance Mutual Fund

Standard Chartered Mutual Fund

Sun F&C Mutual Fund

Sundaram Mutual Fund

Zurich India Mutual Fund

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Vision and Mission Statement of N J IndiaInvest Pvt. Ltd.

Vision:

To be the leader in our sector of business through total Customer Satisfaction, Commitment to

Excellence, Determination to Succeed and finally to provide peace of mind on investment front to

society.

Mission:

Ensure creation of value by providing a differentiating edge to the activities of our customers, investors

and distributors through techno-innovative solutions while fulfilling our social obligations and

maintaining high professional and ethical standards along with the service standards.

Quality policy at NJ IndiaInvest:

NJ aims at providing high quality service on investment front through systematic and professional

approach backed by total management commitment and teamwork. To achieve customer satisfaction at

a cost that represents value. We as a whole are committed to practice a policy.

RIGHT AT THE FIRST TIME & THEN CONTINEOUS IMPROVEMENT IN OUR ACTION & DEALING.

Organization Structure

Sales Dept.

Operations Dept.

Accounts Dept.

Research Depart.

Legal Compliances

HR Dept.

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Performance

Analysis

40 | P a g e

PERFORMANCE MEASURES OF MUTUAL FUNDS:

Mutual Fund industry today, with about 33 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 AMCs and this fame is directly linked to their superior stock selection skills.

For Mutual Funds to grow, AMCs must be held accountable for their selection of stocks. In

other words, there must be some performance indicator that will reveal the quality of stock selection

of various AMCs.

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

Mutual Fund scheme, it should also include the risk taken by the fund manager because different

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

be defined as Variability or fluctuations in the returns generated by it. The higher the fluctuations in

the returns of a fund during a given period, higher will be the risk associated with it. These

fluctuations in the returns generated by a fund are resultant of two guiding forces. First, general

market fluctuations, which affect all the securities, present in the market, called Market risk or

Systematic risk and second, fluctuations due to specific 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.

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

fluctuations in the NAV of the fund vis--vis market. The more responsive the NAV of a Mutual Fund is

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

Mutual Fund with the returns in the market. While Unsystematic risk can be diversified through

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

we try to assess the competitive strength of the Mutual Funds 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.

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Factors affecting Performance:

Returns

Absolute returns measure how much a fund has gained over a certain period. So you look at the

NAV on one day and look at it, say, six months or one year or two years later. The percentage difference will

tell you the return over this time frame.

But when using this parameter to compare one fund with another, make sure that you compare

the right fund. To use the age-old analogy, don't compare apples with oranges.

So if you are looking at the returns of a diversified equity fund (one that invests in different

companies of various sectors), compare it with other diversified equity funds. Don't compare it with a sector

fund which invests only in companies of a particular sector.

Don't even compare it with a balanced fund (one that invests in equity and fixed return

instruments) or any other such investment fund.

Benchmark

This gives a standard by which to make the comparison. It basically indicates what the fund has

earned as against what it should have earned.

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

returns. The Securities and Exchange Board of India, has made it mandatory for funds to declare a benchmark

index.

In effect, the fund is saying that the benchmark's returns are its target and a fund should be

deemed to have done well if it manages to beat the benchmark.

At the current high point in the stock market, almost every equity fund has done extremely well

but many of them have negative benchmark returns, indicating that their performance is just a side-effect of

the markets' rise rather than some brilliant work by the fund manager.

Time period

The most important thing while measuring or comparing returns is to choose an appropriate

time period.

The time period over which returns should be compared and evaluated has to be the same over

which that fund type is meant to be invested in.

If you are comparing equity funds then you must use three to five year returns. But this is not

the case of every other fund.

For instance, cash funds are known as ultra short-term bond funds or liquid funds that invest in

fixed return instruments of very short maturities. Their main aim is to preserve the principal and earn a

modest return. So the money you invest will eventually be returned to you with a little something added.

42 | P a g e

Investors invest in these funds for a very short time frame of around a few months. So it is alright to compare

these funds on the basis of their six month returns.

Market conditions:

It is also important to see whether a fund's return history is long enough for it to have seen all

kinds of market conditions.

For example, at this point of time, there are equity funds that were launched one year ago and

have done very well. However, such funds have never seen a sustained declining market (bear market). So it

is a little misleading to look at their rate of return since launch and compare that to other funds that have

had to face bad markets.

If a fund has proved its mettle in a bear market and has not dipped as much as its benchmark,

then the fund manager deserves praise on his performance.

Measures of Performance:

1. Risk:

Standard Deviation

Standard deviation is a representation of the risk associated with a given portfolio of securities

(actively managed mutual funds, index mutual funds, or ETFs). Risk is an important factor in

determining how to efficiently manage a portfolio of investments because it determines the variation

in returns on the asset and/or portfolio and gives investors a mathematical basis for investment

decisions (known as mean-variance optimization). The overall concept of risk is that as it increases,

the expected return on the asset will increase as a result of the risk premium earned in other words,

investors should expect a higher return on an investment when said investment carries a higher level

of risk, or uncertainty of that return. When evaluating investments, investors should estimate both

the expected return and the uncertainty of future returns. Standard deviation provides a quantified

estimate of the uncertainty of future returns.

Calculating the average return (or arithmetic mean) of a fund over a given number of periods will

generate an expected return on the asset. Subtracting the expected return from the actual return

results in variance for a fixed period. Square the variance in each period to find the effect of the result

on the overall risk of the asset. The larger the variance in a period, the greater risk the security carries.

Taking the average of the squared variances results in the measurement of overall units of risk

associated with the asset. Finding the square root of this variance will result in the standard deviation

of the investment tool in question.

For a mutual fund, the standard deviation is used to measure the variability of monthly returns, as

follows:

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STD = {(1 / T)* (Rt AR)}

Where, STD is the monthly standard deviation, AR is the average monthly return, and T is the number

of months in the period for which the standard deviation is being calculated.

Average Standard deviation can be calculated using the following formula:

Combined Standard Deviation = {(N1 * S1 + N2 * S2 + N1 * D12

+ N2 * D22) / (N1 + N2)}

Where,

N1 = Number of observations of the first group

N2 = Number of observations of the second group

S1 = Standard Deviation of the first group

S2 = Standard Deviation of the second group

D1 = |X12| - |X1

D2 = |X12 | - |X2l

X1 = Average of the first group

X2 = Average of second group

X12 = Combined Average of the two groups

(Beta) Co-efficient Systematic risk is measured in terms of Beta, which represents fluctuations in the NAV of the fund vis-

-vis market or benchmark.

For example, if a fund is benchmarked against the BSE 100, a beta of more than 1 would imply that

the fund is more volatile than the index. And of course, a beta of less than 1 would imply lesser

volatility.

Allow us to explain further. Let's say there are two funds, one with a beta of 2.5 and the other with

0.4, both benchmarked against the same index. Now, if the market rises by 1 per cent, the first fund

will rise by approximately 2.5 per cent, while the latter will rise by 0.4 per cent. A similar relationship

will take place in a falling market. In simpler words, beta is a quantitative measure of a fund (or stock)

relative to the 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.

(Beta) is calculated as = {N (XY) XY} / {N (X2) (X) 2 } While unsystematic risk can be diversified through investments in a number of instruments,

systematic risk cannot.

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

vis--vis one another in a better way.

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2. Return

Absolute returns

Absolute returns measure how much a fund has gained over a certain period. So look at the NAV on one

day and look at it, say, six months or one year or two years later. The percentage difference will tell you

the return over this time frame. To have uniformity in rate of returns, find CAGR (for more than a year).

But when using this parameter to compare one fund with another, make sure that you compare the

right fund.

Benchmark returns

This will give you a standard by which to make the comparison. It basically indicates what the fund has

earned as against what it should have earned.

In the case of equity diversified fund which declares BSE 100 as its benchmark, to know its performance

one can compare the funds return with that of BSE 100 returns.

In effect, the fund is saying that the benchmark's returns are its target and a fund should be deemed to

have done well if it manages to beat the benchmark.

3. Risk adjusted Return

The Sharpes Measure:-

This formula, worked by Nobel Laureate Bill Sharpe, tries to quantify how a fund performs relative to

the risk it takes. Take a fund's returns in excess of a guaranteed investment (a 90-day T-bill) and divide

by the standard deviation of those returns. The bigger the Sharpe ratio, the better a fund performed

considering its riskiness. This ratio has an advantage over alpha because it uses standard deviation

instead of beta as the volatility variable, and therefore you don't have to worry that a fund doesn't

relate well to the chosen index. 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 = (Ri - Rf)/Si

Where,

Ri represents return on fund, Rf is risk free rate of return and 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.

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

45 | P a g e

the fund 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, 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.

Alpha = Ri Rm

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.

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RESEARCH

METHODOLOGY

47 | P a g e

NEED OF THE STUDY:

The 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 tolerance 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

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

international firms. A Mutual Fund is the ideal investment vehicle for todays complex and modern

financial scenario.

SCOPE:

The study here has been limited to analyze open-ended schemes of different Asset

Management Companies randomly selected as per the sample size. Each type of scheme is

analyzed according to its performance against the other, based on factors like Returns,

Standard deviation, Sharpes Ratio, (Beta) Co-efficient, Alpha Co-efficient and Benchmark.

OBJECTIVES:

The major objectives of study are as follows.

To evaluate investment performance of mutual funds in terms of risk and return.

To examine the funds sensitivity to the market fluctuations in terms of beta.

To find out the financial performance of mutual fund schemes.

To appraise investment performance of mutual funds with risk adjustment, the

theoretical parameters as suggested by Sharpe and Jenson.

To analyze the performance of various schemes of mutual funds.

48 | P a g e

Type of the study:

The type of the study or research used in this project is a descriptive research design. The

main objective of descriptive research is to describe the state of affairs as it exists at present.

Thus a descriptive study is a fact finding investigation with adequate interpretation. It focuses

on particular aspects or dimensions of the problem studied. It is designed that it gathers

descriptive information and provides information for formulating more sophisticated studies.

There is a cause effective relationship.

The criteria for selecting this particular design are that, the problem of the project must be

described and not arguable. The data collected is amenable to statistical analysis and has

accuracy and significance. It is possible to develop to valid standards of comparison. It tends

itself to the verifiable procedure of collection and analysis of data.

Type of data:

The data which is used for the research is secondary data. The secondary data is the data which is the

duplicate of primary data. The data (published or unpublished) which have already been collected

and processed by some agency or person is taken over from there and used by any other agency for

their statistical work are termed as secondary data as far as second agency is concerned. All the data

collected for the purpose of the study are as per 19th June 2009.

Sampling technique:

Descriptive random sampling technique is used for selecting samples. Random numbers are generated

for selecting schemes as well as fund houses by using Microsoft Excel.

Selection of Sample:

Sample size has been calculated by the following formula,

Sample size = N / (1 + N * e)

Where:

N = Size of population

(e) = The desired level of precision

49 | P a g e

Calculation:

For Fund house:

No. of available funds = 33

Now Sample Size = {33 / (1 + 33 * 0.4)} = 5

Where, precision level (e) is taken as 40%

So Sample size selected for study is = 5

Random Numbers for selection of funds are 4, 7, 23, 27 and 32.

(The numbers are generated assuming uniform distribution)

For Schemes:

Types of Schemes available = 13

Now sample size = {13 / (1 + 13 * 0.4) = 4

Where, precision level (e) is taken as 40%

Sample size selected for study is = 4

Random Numbers for selection of schemes are 3, 8, 10 and 12.

(The numbers are generated assuming uniform distribution)

Selected Fund houses and Schemes:

Sr. No Name of AMC Sr. No. Name of Scheme

1 Birla Sun Life Mutual Fund 1 Equity

2 Sundaram Mutual Fund 2 gilts fund

3 Principal Mutual Fund 3 debt income fund

4 Reliance Mutual Fund 4 balance fund

5 Tata Mutual Fund

(For list of Fund houses and schemes refer to Annexure 2)

50 | P a g e

Description about the schemes selected:

Equity fund:-

Objective:

The primary investment objective of the Scheme is to achieve long-term growth of capital by investment in equity

and equity related securities through a research based investment approach.

Scheme type:

Equity - Open-ended Equity Scheme

Investment options:

Growth

Dividend (Pay out and Reinvestment)

Subscription:

One time

Systematic investment plan.

Sweep Option.

Asset allocation:

Equity and equity related instruments more than 65%.

Debt and Money Market Instruments Up to 35%.

Benchmark:

BSE 200

BSE 100

Risk type: Medium to high.

Fund House Birla Sun

Life Principal Reliance Sundaram Tata

Fund Name Birla Sun Life

Equity

Principal

Growth

Reliance

Growth

Sundaram BNP

Paribas Growth

Tata Pure

Equity

Portfolio

Manager Mahesh Patil

Shyam

Sunder Bhat

Sunil B.

Singhania J Venkatesan

M Jajoo, M

Venugopal

Launch Date Aug-98 Oct-00 Oct-95 Mar-97 May-98

Class Equity Equity Equity Equity Equity

Category Diversified Diversified Diversified Diversified Diversified

51 | P a g e

CDSC Yes Yes Yes Yes Yes

Risk Grade Avg. Above Avg. Avg. Avg. Below Avg.

Return Grade Above Avg. Below Avg. Above Avg. Avg. Avg.

Front-End (%) 2.25 2.25 2.25 2.25 2.25

Back-End 0 0 0 0 0

Minimum

Initial (Rs.) 5,000 5,000 5,000 5,000 5,000

Market Cap 31,595.46 29,671.08 14,109.16 46,733.10 27,056.21

Turnover (%) 225 197 97 84 75

Assets(RS.Cr.) 950.91 168.69 4,376.02 121.32 307.76

Expense ratio 2.16 2.4 1.83 2.44 2.5

Debt fund:

Objective:

To generate regular income and capital appreciation / accretion through investment in debt instruments

and related securities besides preservation of capital is a major consideration.

Scheme type:

Open-ended Income Scheme

Investment options:

Growth


Subscription:

One time


Asset allocation:

Money Market instruments and cash up to 100%

Debt Securities up to 100%

Benchmark:

CRISIL Composite Bond Fund Index

52 | P a g e

Risk type: Low to medium

Fund House Birla Sun Life Principal Reliance Sundaram Tata


Income

Principal

Income

Reliance

Income

Sundaram BNP Paribas

MIP

Tata

Income

Portfolio

Manager

Maneesh

Dangi

Badrish

Kulhalli

Prashant R

Pimple

K Ramkumar, Satish

Ramanathan

Kinshuk

Sharma

Launch Date Mar-97 Oct-00 Dec-97 Dec-03 Apr-97

Class Debt Debt Debt Debt Debt

Category Medium term Medium

term

Medium

term

Hybrid: Monthly

Income

Medium

term

CDSC Yes Yes Yes Yes Yes

Avg. Credit

Quality AAA AAA AAA AAA GOI/Cash

Risk Grade High Avg. Above Avg. Avg. Avg.

Return Grade Avg. Avg. Above Avg. Below Avg. Below Avg.

Minimum Initial

(Rs.) 5,000 5,000 5,000 5,000 5,000

Average

Maturity (Yrs) 7.67 4.78 5.42 10.59 1.54

Assets (Rs. Cr.) 790.43 78.66 1,844.86 21.91 102.39

Expense 1.91 2 1.48 2.06 2.25

Balanced fund:

Objective:

To generate capital appreciation and current income, through a judicious mix of investments in equities

and fixed income securities.

53 | P a g e

Scheme type:

An Open ended Balanced Scheme

Investment options:

Growth


Subscription:

One time


Asset allocation:

Equity and equity related instruments 50 to 70%.

Debt and Money Market Instruments 30 to 50%.

Benchmark:

CRISIL Composite Bond Fund Index

Risk type: Low to high

Fund House Birla Sun Life Principal Sundaram Tata


Freedom

Principal

Balanced

Sundaram BNP Paribas

Balanced Reg Tata Balanced

Portfolio

Manager

Vineet Maloo,

Maneesh Dangi

Pankaj

Tibrewal

Satish Ramanathan,

Rahul Pal

Mahendra Jajoo, M

Venugopal

Launch Date Oct-99 Dec-99 May-00 Oct-95

Class Balanced Balanced Balanced Balanced

Category Hybrid: Equity-

oriented

Hybrid: Equity-

oriented Hybrid: Equity-oriented

Hybrid: Equity-

oriented

CDSC Yes Yes Yes Yes

Avg. Credit

Quality GOI/Cash AAA AAA AAA

Risk Grade Below Avg. Above Avg. Avg. Avg.

Return Grade Avg. Avg. Avg. Above Avg.

54 | P a g e

Front-End (%) 2.5 2.25 2.25 2.25

Back-End (%) 0 0 0 0

Minimum

Initial 5,000 5,000 5,000 5,000

Average

Maturity (Yrs) 1 7.15 5.62 --

Market Cap 89,810.12 17,541.84 52,968.55 17,206.88

Turnover (%) 624 424 42 57

Assets (Rs. Cr.) 112.89 46.53 35.13 194.62

Expense ratio 2.5 2.5 2.5 2.5

Gilts fund:

Objective:

To generate risk-free return through investment in sovereign securities and thus provide medium to long

term capital gains and income distribution to its Unit holders, while at all times emphasizing the

importance of capital preservation.

Scheme type:

An Open ended Government Securities Scheme

Investment options:

Growth


PF option.

Subscription:

One time

Asset allocation:

Government Securities 65 to 100%.

Money market instruments up to 35%.

Benchmark:

I-Sec Li-BEX

Risk type: Low to medium

55 | P a g e

Fund House Birla Sun Life Principal Reliance Sundaram Tata


Gilt Plus Reg

Principal

GSF S

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