MUTUAL FUND MARKET AND RESEARCH WORK ON KOTAK50 SCHEME

7/27/2019 MUTUAL FUND MARKET AND RESEARCH WORK ON KOTAK50 SCHEME

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A GLOBALLY PROVEN INVESTMENT AVENUE

Worldwide, Mutual Fund or Unit Trust as it is referred to in some parts of the

world, has a long and

successful history. The popularity of Mutual Funds has increased manifold in

developed financial markets, like the United States. As at the end of March 2013, in

the US alone there were 8,002 mutual funds with total assets of over US$ 9.36 trillion(Rs.427Iakh crores).

In India, the mutual fund industry started with the setting up of the Unit Trust of

India in 1964. Public sector banks and financial institutions were allowed to establish

mutual funds in 1987.Since 1993, private sector and foreign institutions were permitted to

set up mutual funds.

In February 2003, following the repeal of the Unit Trust of India Act 1963 the

erstwhile UTI was bifurcated into two separate entities viz. The Specified

Undertaking of the Unit Trust of India, representing broadly, the assets of US 64

scheme, assured returns and certain other schemes and UTI

Mutual Fund conforming to SEBI Mutual Fund Regulations.

As at the end of March 2006, there were 29 mutual funds, which managed assets of Rs.

2,31,862 crores ( US $ 52 Billion) under 592schemes. This fast growing industry is

regulated by the Securities and Exchange Board of India (SEBI).

Introduction of Study


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About Kotak50 (scheme is ranked 3rd

in large cap)Kotak50 mainly invests in companies with large market capitalization segment across various

sectors. The schemes endeavors to identify companies that are relatively stable in

comparison tobroader market and endeavors to select stocks based on financial strengthof companies, management strategies and reputation , track record and liquidity . The

investment objective of the scheme is to generate capital appreciation from a portfolio of

predominantly equity related securities.Scheme details:

Fund typeopen-ended

Investment plangrowth

Launch datedec 22, 1998

BenchmarkCNX NIFTY

Asset size (Rs. Cr.)719.67 ( june 30, 2013)

Minimum investmentRs.5000

Last dividend Rs.1.00 (dec-28-2001)

BonusN.A

Fund managerPardeep Kumar

Note: kotak30 has been renamed as kotak50 with effect from January 01, 2011.

Load details:

Entry load : N.A

Exit load : 1.00%


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To examine the performance of selected schemes on the basis of risk and return andcompare the performance of selected schemes with benchmark index to see whether the

scheme is outperforming or underperforming the benchmark.

To examine the performance of selected schemes by using the portfolio performanceevaluation models namely Sharpe, Alpha and Jensen.

To better understand the Mutual Fund market.

To know K50 is better option for investing the money or not.

To identify the level of risk involved in investing in equity diversified mutual fundschemes.

Objective of study:


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Helps to know about the Mutual Funds. Helps to know about the various schemes and types of funds. Helps to know the risk level of K50 scheme. Helps to know about the various sectors where the money is invested in K50.

Significance of study:


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Money control.comApr 26, 2013, 03.11 PM IST

Sharekhans Fund analysis: Kotak 50 Fund

Sharekhan in its latest report has provided an analysis on Kotak 50, an open ended equity

scheme. Sharekhan in its latest report has provided an analysis onKotak 50, an open ended

equity scheme with an investment objective to invest predominantly in large-cap stocks that are

diversified across sectors and form a significant proportion of the total market capitalisation.

Scheme analysis:

With more than twelve years in existence, the fund has been a consistent outperformer in

comparison with both the benchmark index, CNX Nifty, and the category average. Despite

volatility and uncertainties in the market, the fund performed much better than its peers, giving

returns of 7.7% over one year as against that of 4.3% and 5.3% given by the benchmark index

and the category average respectively in the same period. Over the longer time horizon of three

years, the fund has grown at 2.8% compounded annual growth rate while the BSESensexand

the category average have grown at 0.9% and 2.0% respectively. In recent months the fund has

garnered returns of -0.5%, higher than the -3.4% return posted by the benchmark index and the -

3.3% return from the largecap funds category average.

The fund currently has about 40 stocks in its portfolio. It has nearly 98.9% of its net assets

exposed to equity while the rest is exposed to the other money-market instruments. The top ten

stocks form about 54.4% of the portfolio. The fund has invested nearly 18.9% of its capital in the

banking sector followed by the oil & gas and pharmaceutical sectors with 17% and 10.6%

allocations respectively.

SEBI has banned entry loads. So, the sale price needs to be the same as NAV as on 01-08-2009.

Review of existing literature:
http://www.moneycontrol.com/mutual-funds/nav/kotak-50/MKM003http://www.moneycontrol.com/mutual-funds/nav/kotak-50/MKM003http://www.moneycontrol.com/mutual-funds/nav/kotak-50/MKM003http://www.moneycontrol.com/sensex/bse/sensex-livehttp://www.moneycontrol.com/sensex/bse/sensex-livehttp://www.moneycontrol.com/sensex/bse/sensex-livehttp://www.moneycontrol.com/sensex/bse/sensex-livehttp://www.moneycontrol.com/mutual-funds/nav/kotak-50/MKM003


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Research methodology is a way to systematically solve the research problem. It may be

understood as a science how research is done scientifically. Research methodology refers to the

tools and the methods used for obtaining information for the purpose of the research study.

Research not only need to know how to develop certain indices or tests, how to calculate the

mean, the mode, median, how to apply particular research techniques but also need to know

which of these methods or techniques are relevant and which are not and what would they mean

and indicate and why. All this means that it is necessary for the researcher to design his

methodology for his problem as the same way differ from problem to problem.

DATA COLLECTION

To achieve the objectives, the primary as well as secondary source of data are used. Primary

source includes the employees and managers of the companies through interview.

The data were collected through the following methodical techniques in the present project

work.

TWO TYPES OF DATA

PRIMARY DATA SECONDARY DATA

RESEARCH METHODOLOGY


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PRIMARY DATA:-

Primary data is that kind of data which is collected by the investigator himself for the purpose of

the specific study.

The data such collected is original in character. The advantage of third method of collection is

the authenticity.

SECONDARY DATA: -

When an investigator uses the data that has been already collected by others is called secondarydata. The secondary data could be collected from Journals, Reports and Various Publications.

The advantages of secondary data can be economical, both in the term of money and time spent.

The researcher of the reporter also did the same and collected secondary from various internet

sites like Google.com, moneycontrol.com and many more.


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Research Design And Sampling

RESEARCH DESIGN Descriptive and Analytical Research

COLLECTION OF DATA Primary data ( Interview)

Secondary data (Websites, Books)


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Our history

Kotak Mahindra is one of India's leading financial institutions, offering complete financial solutions thaencompass every sphere of life. From commercial banking, to stock broking, to mutual funds, to life

insurance, to investment banking, the group caters to the financial needs of individuals and corporates

The group has a net worth of Rs.7,911 crore and employs around 20,000 employees across its variou

businesses, servicing around 7 million customer accounts through a distribution network of 1,716

branches, franchisees and satellite offices across more than 470 cities and towns in India and offices in

New York, California, San Francisco, London, Dubai, Mauritius and Singapore.

Our business

Kotak Mahindra Asset Management Company Limited (KMAMC), a wholly owned subsidiary of KotakMahindra bank Limited (KMBL), is the Asset Manager for Kotak Mahindra Mutual Fund (KMMF)

KMAMC started operations in December 1998 and has over 10 Lac investors in various schemes

KMMF offers schemes catering to investors with varying risk - return profiles and was the first fund

house in the country to launch a dedicated gilt scheme investing only in government securities. The

company is present in 76 cities and has 79 branches.

Our purpose

Our vision is to be a responsible player in the Indian mutual fund space, always striving to offer best inclass products across investor lifecycle. We strive hard to deliver consistent performance over the

benchmark across all our products, thereby creating customer satisfaction. Our 12 years of existence

offering a broad range of investment products across asset classes with varying risk parameters that cater

to needs of various customer segments, have enabled us to garner trust of over 10 lac investors.

Company profile:


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Management

Directors : trustee company

Mr. Amit Krishnakant DesaiMr. Amit Krishnakant Desai, is a Graduate in Commerce and Law from the Bombay

University. He is a senior advocate and has about 31 years of experience in criminal,

economic and revenue laws. He is associated with the Sponsor.

Mr. Noshir DasturMr. Noshir Dastur, is a B.Com, Fellow Chartered Accountant from the Institute of

Chartered Accounts of India. He is a Partner with Dubash & Patil, Chartered Accountants

from January 1992. He was also a Partner with Bhandari Dastur Gupta & Associates,

Chartered Accountants for period of ten years ending in March 2008.

Mr. Girish SharedalalMr. Girish Sharedalal, is a graduate in Commerce and Arts and also a Fellow of the

Institute of Chartered Accountants of India. Formerly a Senior Partner of Messrs Dalal,

Desai and Kumana, a firm of Chartered Accountants. He has about 53 years of

experience in the field of audit, taxation and management consultancy.

Mr. Chandrashekhar SatheMr. Chandrashekhar Sathe, is a Graduate with B.Tech. (Chemical Engineering) from

IIT, Mumbai. He has over 35 years' experience in Banking and Finance. He has been a

part of the Senior Management team of the Kotak Mahindra Group since 1992 and was

responsible for setting up the Fixed Income Securities capability of Kotak Mahindra

Capital Company. Prior to Kotak Mahindra, he was with the Bank of Nova Scotia and

Bank of Maharashtra and has wide ranging experience in Banking, Finance,

Administration, Credit, Foreign Exchange and Money Markets. Mr. Sathe was the Chief

Executive Officer of the AMC for the period, 1st April, 1998 to 30th November, 2001.
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He retired from Kotak Mahindra Bank as Head of Risk in the year 2009. He is also

associated with the Sponsor.

Mr. Balan Wasudeo

Mr. Balan Wasudeo, B.Sc. from the University of Madras and PGDBA from the Indian

Institute of Management, Ahmedabad, has over 37 years experience in the areas of

Treasury, Finance, Projects, Strategic Planning, Risk Management and General

Management. His significant achievements include financing large organic and inorganic

growth through various debt and capital market instruments in India and abroad. Mr.

Balan's career spans a unique combination of Multinational Companies, Public Sector

Company and Family Owned Companies. It also involves developing sound relationships

with International Multilateral agencies, International Commercial banks and Financial

Institutions and banks in India. Mr. Balan is presently a consulting CFO. Mr. Balan

Wasudeo was Chief Financial Officer of Great Eastern Shipping Company Ltd. Mr.

Balan Wasudeo has also received the Best Performing CFO Award in Logistics Sector

from CNBC TV18 in 2006

Directors : assest management company

Mr. Uday S. Kotak

Mr. Uday S. Kotak, is a graduate in Commerce and a post-graduate in Business

Administration from Jamnalal Bajaj Institute of Management Studies of Mumbai

University. Mr. Kotak is the Vice Chairman and Managing Director of the Sponsor,

Kotak Mahindra Bank Ltd., and the chairman of various other companies, and has over

26 years of experience in the Financial Services industry. He is associated with the

sponsor.

Mr. Romesh. C. Khanna

Mr. Romesh. C. Khanna, is a Graduate in Commerce from London University, a Fellow

of the Institute of Chartered Accountants of England & Wales, a Fellow of the Institute of
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Chartered Accountants of India, an Associate of the Chartered Institute of Management

Accountants, London and an Associate of the Institute of Cost and Works Accountants of

India. He was a partner in A.F. Ferguson & Co., a firm of Chartered Accountants till

March 31st, 1998. Mr. Khanna has over 59 years of experience in Audit, Taxation,Finance and other related areas.

Mr. Sukant S. Kelkar

Mr. Sukant S. Kelkar, is a post-graduate in commerce. He has about 45 years of

experience in finance, capital markets, and related areas. Mr. Kelkar has over 12 years

experience in the Bank of India, and has even been a foreign exchange dealer in London

for 3 years during this tenure. Following this, Mr. Kelkar worked with Bombay Dyeing

Manufacturing Company Limited for 31 years, finally retiring as Executive Director in

July 2001. He is on the Board of major Wadia Group Companies as a Non- Executive

Director.

Mr. Chengalath Jayaram

Mr. Chengalath Jayaram, holds a postgraduate diploma in Management from IIMC,

Calcutta, Mr. C. Jayaram, Joint Managing Director, Kotak Mahindra Bank Ltd., has been

with the Kotak group since 1990. He has been a member of the Kotak Mahindra Board

since October 1999, and a whole-time director on the board of Kotak Mahindra Bank

since 2003. Mr. Jayaram heads the wealth management business and international

operations for Kotak Mahindra group. He also oversees the alternative investments

business which includes private equity funds and real estate funds. With over 25 years

experience in many areas of finance and business, Mr. Jayaram has been instrumental in

building numerous businesses for the Kotak Mahindra Group and has headed Kotak

Securities Ltd as CEO in the past. He also played a crucial role in the setting up the car

finance business. Prior to joining Kotak, Jayaram had worked with ICICI, and the

consultancy division of A.F. Ferguson. He is associated with the sponsor.
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Mr. Bipin R. Shah

Mr. Bipin R. Shah, a member of the Institute of Chartered Accountants of India, holds a

Bachelor's Degree in Commerce from Bombay University. He has 52 years of work

experience. Mr. Shah began his career in 1956, with Hindustan Lever Limited, where he

held various Senior Commercial Assignments, including the post of Commercial

Manager at its largest soaps, detergents and foods factory in Bombay, Chief Buyer, Raw

Materials and Head of Foods Business. He became a Director of the company in 1979,

assuming responsibility for Foods, Animal Feeds, Agri Products and Exports Business,

and managed a commendable turnaround of the company's dairy business. In 1981, Mr.

Shah also became Chairman of another Unilever subsidiary, Lipton India Limited, which

was facing losses and financial crisis. Mr. Shah was responsible for turning the company

around, and for reviving employee and investor confidence. Mr. Shah was also Chairman

of Export Business of four Unilever Companies in India viz. Hindustan Lever Ltd.,

Lipton India Ltd., Brooke Bond India Ltd. and Ponds India Ltd. On his retirement from

the Lever Group of Companies in 1992, Mr. Shah joined Indus Venture Management

Ltd., where he he was the Vice Chairman until May 2006. Mr. Shah is also a non

Executive Director on the Board of several companies.

Mr. Gaurang Shah

Mr. Gaurang Shah, Member of The Institute of Chartered Accountants of India, Member

of The Institute of Cost and Work Accountants of India, Member of The Institute of

Company Secretaries of India. M. Com. from Gujarat University. Mr. Gaurang Shah is

the Group Head - Asset Management and Life Insurance at Kotak Mahindra Group and is

responsible for Domestic and International Asset Management and Life Insurance

businesses of the Group. In his immediate prior assignment, he was the Managing

Director of Kotak Mahindra Old Mutual Life Insurance Limited, (a 74:26 joint venture

between Kotak Mahindra Bank Ltd., its affiliates and Old Mutual plc) among India's

leading Life Insurers. Mr. Shah has over 29 years of rich and varied experience primarily

in the Financial Services sector, several of which are in the Kotak Mahindra Group. He is

associated with the Sponsor.


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Mr. Pranab Kumar Datta

Mr. Pranab Kumar Datta, is B.Com, ACA, FRICS, He is Vice Chairman & Managing

Director, Knight Frank (India) Pvt. Ltd. He has multi-functional experience of over 40

years covering Finance, Sales & Marketing, Corporate Planning, Profit Centre

Management and General Management in diverse industries such as engineering,

electronics, consumer durables, consumer products, edible oil and food products, real

estate development and consulting. He has occupied senior management positions in

large conglomerates such as TATAs and Mahindras. He has been involved in several

organizational turnaround and transformation processes.

Fund manager : assest management company

Debt Team

Ms. Lakshmi Iyer

Senior Vice President & Head (Fixed Income and Products) Ms. Lakshmi Iyer has been

with the Asset Management Company since 1st November 1999. From 1999-2006

Lakshmi was performing the role of a fund manager where she was responsible for credit

research as well as deal execution, managing fund performance across all debt funds and

assisting sales in client interaction where required. From September 2006 till September

2008 she was Heading Products where her primary responsibilities were product related

initiatives, product pricing and coordinating with the funds management and sales team

in the role of a portfolio specialist. From September 2008 till date she is heading the

Fixed Income and Products team. In her earlier stint, from November 1997-October 1999

in Credence Analytics Pvt Ltd. she has also worked as a Research Analyst where she was

tracking corporate bond markets in India and generating research reports. She was alsoinstrumental in conceiving various financial software tools for Indian markets through

effective liasoning with software and technical team at Credence.
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Mr. Abhishek BisenVice PresidentMr. Abhishek Bisen has been associated with the company since October

2006 and his key responsibilities include fund management of debt schemes. Prior to

joining Kotak AMC, Abhishek was working with Securities Trading Corporation Of

India Ltd where he was looking at Sales & Trading of Fixed Income Products apart from

doing Portfolio Advisory. His earlier assignments also include 2 years of merchant

banking experience with a leading merchant banking firm. The schemes managed by him

are Kotak Monthly Income Plan, Kotak Bond Short Term, Kotak Bond, Kotak Gilt

Savings, Kotak Gilt Investment, Kotak Flexi Debt, Kotak Floater Long Term, Kotak

Floater Short Term, Kotak Liquid, Kotak Income Opportunities Fund, Kotak Multi Asset

Allocation Fund, Kotak FMP's on the debt side and Kotak Balance and Kotak Global

Emerging Market Fund on the equity side. Abhishek's educational background is B.A

(Management) and MBA (Finance).

Mr. Deepak AgrawalVice President Mr. Deepak Agrawal's career has started from Kotak AMC when he

joined the organization in December 2002 where he was initially in Research, Dealing

and then moved into Fund Management from November 2006 where he is managingKotak Bond Short Term, Kotak Flexi Debt, Kotak Floater Short Term, Kotak Liquid,

Kotak Bond, Kotak Gilt Savings, Kotak Gilt Investment, Kotak Floater Long Term and

Kotak Income Opportunities. Deepak is a Post Graduate in Commerce, Chartered

Account, Company Secretary and currently pursuing CFA.

Mr. Mayank Prakash

Associate Vice President Mr. Mayank Prakash has been associated with the company

since September 2005. He has 5 years experience In fund management areas and

manages all FMPs and QIPs. He is a chartered Accountant and MBA (Finance) from

Institute of Business Management Kanpur. Mayank has also played table tennis

professionally at the State Level, has keen interest in music and also knows how to play

tabla.
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Equity Team

Mr. Harsha Upadhyaya

Sr. Vice President & Head of Equity Mr. Harsha Upadhyaya, is Bachelor of Engineering

(Mechanical) from National Institute of Technology, Suratkal, Post Graduate in

Management (Finance) from Indian Institute of Management, Lucknow and Chartered

Financial Analyst from the CFA Institute. Harsha has 18 years of rich experience spread

over Equity Research and Fund Management. His prior stints have been with companies

such as DSP BlackRock, UTI Asset Management, Reliance Group and SG Asia

Securities. He heads the equity management team at Kotak AMC, and personally

manages Kotak Opportunities Fund and Kotak Select Focus Fund. On the personal front,

Harsha has a passion for sports and is a university level hockey player. He likes travelling

and enjoys exploring new destinations.

Mr. Emmanuel Elango

Vice President Mr. Emmanuel Elango joined Kotak Mutual Fund as an Equity Fund

Manager in July 2008. He has nearly 10 years of experience in fund management and

equity research. Prior to joining Kotak Mutual Fund Mr. Emmanuel was a key member of

the Equity Investment Team at Franklin Templeton India AMC. In the past he has also

been a part of the Equity Research Team at J.P. Morgan. He started his career as a Design

Engineer with Bosch. Mr. Elango is a B.E. (Mech)from NITK and a PGDM (IIM

Bangalore). The schemes managed by him include Kotak Classic Equity and Kotak

Balance.

Mr. Pankaj TibrewalVice President Mr. Pankaj Tibrewal is a graduate in Commerce from St. Xavier's

College, Kolkata and holds a Master's degree in Finance from Manchester University.

Pankaj has been associated with the mutual fund industry since 2003 where he has
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managed several debt and equity schemes. Pankaj's earlier stint was with Principal

Mutual Fund where he was managing schemes like Principal Emerging Bluechip,

Principal Tax Saver and MIPs. He joined Kotak AMC from January 2010 as an Equity

Fund Manager where he manages schemes like Kotak Midcap, Kotak Emerging Equity,Kotak TaxSaver, and Kotak Monthly Income Plan. Pankaj's hobbies include listening to

hindi music, travelling and reading.

Mr. Pradeep Kumar

Vice PresidentMr Pradeep Kumar has joined Kotak Mutual Fund as a Fund Manager in

the Equity Fund Management and manages Kotak 50. He brings with him over 13 years'

experience in fund management and equity analysis and joins us from Religare India

Asset Management Co. Prior to joining Religare Asset Management, he was a fund

manager in ABN Amro Mutual Fund & was also associated with DBS Cholamandalam

AMC initially as an equity analyst and then as a fund manager. Before his entry into the

investment field, Pradeep has also worked as a Mechanical Engineer with Hindustan

Copper Ltd for around 2 years. Along with being a CFA Charter holder, Pradeep holds a

Mechanical Engineering degree and has also completed his Masters of Management

Studies in Finance from Sydenham Institute of Management. His hobbies include playing

various kinds of sports and reading.

Mr. Deepak Gupta

Associate Vice President Mr. Deepak Gupta has almost 8 years of experience in the

mutual fund industry. He had joined the Equity Fund Management team as a research

analyst. He is now an Equity Fund Manager & manages Kotak Equity Arbitrage, Kotak

Global Emerging Market Fund, Kotak Equity Fund of Fund, Kotak Hybrid Fixed Term

Plan, Kotak Nifty ETF, Kotak PSU Bank ETF and Kotak SENSEX ETF. Deepak is a

Graduate in Commerce from Mumbai University. He is a qualified Chartered

Accountant, a Cost Accountant and has cleared the AIMR CFA Level 3. His hobbies

include listening to music and reading books.


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Introduction to topic:

I. IntroductionThe Indian mutual fund industry has witnessed significant growth in the past few years driven by

several favourable economic and demographic factors such as rising income levels, and the

increasing reach of Asset Management Companies and distributors. However, after several years

of relentless growth ,the industry witnessed a fall of 8% in the assets under management in the

financial year 2008-2009 that has impacted revenues and profitability. Whereas in 2009-10 the

industry is on the road of recovery.

II. History of Mutual FundsThe 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.

First Phase1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the

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 Phase1987-1993 (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 December

1990.

At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 Crores.

Third Phase1993-2003 (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

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 othermutual funds


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Fourth Phasesince February 2003

In February 2003, following 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.

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.76,000 Crores of assets under

management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual

Fund.

The graph indicates the growth of assets over the years:


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Assets of the mutual fund industry touched an all-time high of Rs639,000 crore (approximately

$136 billion) in May, aided by the spike in the stock market by over 50 per cent in the last one

month and fresh inflows in liquid funds, data released by the Association of Mutual Funds in

India (AMFI) shows yesterday.

The country's burgeoning mutual fund industry is expected to see its assets growing by 29%

annually in the next five years. The total assets under management in the Indian mutual funds

industry are estimated to grow at a compounded annual growth rate (CAGR) of 29 per cent in the

next five years," the report by global consultancy Celent said. However, the profitability of the

industry is expected to remain at its present level mainly due to increasing cost incurred todevelop distribution channels and falling margins due to greater competition among fund houses,

it said.

III. Regulatory FrameworkSecurities and Exchange Board of India (SEBI)

The Government of India constituted Securities and Exchange Board of India, by an Act ofParliament in 1992, the apex regulator of all entities that either raise funds in the capital markets

or invest in capital market securities such as shares and debentures listed on stock exchanges.

Mutual funds have emerged as an important institutional investor in capital market securities.

Hence they come under the purview of SEBI. SEBI requires all mutual funds to be registered

with them. It issues guidelines for all mutual fund operations including where they can invest,

what investment limits and restrictions must be complied with, how they should account for

income and expenses, how they should make disclosures of information to the investors and

generally act in the interest of investor protection. To protect the interest of the investors, SEBI

formulates policies and regulates the mutual funds. MF either promoted by public or by private

sector entities including one promoted by foreign entities are governed by these Regulations.

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

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


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schemes of the fund in its custody. According to SEBI Regulations, two thirds of the directors of

Trustee Company or board of trustees must be independent.

Association of Mutual Funds in India (AMFI)

With the increase in mutual fund players in India, a need for mutual fund association in

India was generated to function as a non-profit organisation. Association of Mutual Funds in

India (AMFI) was incorporated on 22nd August, 1995.

AMFI is an apex body of all Asset Management Companies (AMC) which has been

registered with SEBI. Till date all the AMCs are that have launched mutual fund schemes are its

member. It functions under the supervision and guidelines of its Board of Directors.

Association of Mutual Funds India has brought down the Indian Mutual Fund Industry

to a professional and healthy market with ethical line enhancing and maintaining standards. It

follows the principle of both protecting and promoting the interests of mutual funds as well as

their unit holders.

The objectives of Association of Mutual Funds in India

The Association of Mutual Funds of India works with 30 registered AMCs of the country.

It has certain defined objectives which juxtaposes the guidelines of its Board of Directors. The

objectives are as follows:

This mutual fund association of India maintains high professional and ethical standards inall areas of operation of the industry.

It also recommends and promotes the top class business practices and code of conductwhich is followed by members and related people engaged in the activities of mutual

fund and asset management. The agencies who are by any means connected or involved

in the field ofcapital markets and financial services also involved in this code of conduct

of the association.
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AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fundindustry.

Association of Mutual Fund of India do represent the Government of India, the ReserveBank of India and other related bodies on matters relating to the Mutual Fund Industry.

It develops a team of well qualified and trained Agent distributors. It implements aprogram of training and certification for all intermediaries and other engaged in the

mutual fund industry.

AMFI undertakes all India awareness program for investors in order to promote properunderstanding of the concept and working of mutual funds.

At last but not the least association of mutual fund of India also disseminate informationon Mutual Fund Industry and undertakes studies and research either directly or in

association with other bodies.

IV. Concept of Mutual F und

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 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 the

working of a mutual fund:


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Mutual fund operation flow chart

Mutual funds are considered as one of the best available investments as compare to others. They

are very cost efficient and also easy to invest in, thus by pooling money together in a mutual

fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to

do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing

risk & maximizing returns.

Organization of a Mutual Fund

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

mutual fund


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V. Types of Mutual Fund schemes in INDIAWide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk

tolerance and return expectations.

Overview of existing schemes existed in mutual f und category: BY STRUCTURE

Open - Ended Schemes: An open-end fund is one that is available for subscription all through the

year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net

Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.

Close - Ended Schemes: A closed-end fund has a stipulated maturity period which generally

ranging from 3 to 15 years. The fund is open for subscription only during a specified period.

Investors can invest in the scheme at the time of the initial public issue and thereafter they can

buy or sell the units of the scheme on the stock exchanges where they are listed. In order to

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

units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations

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

Classification of

Mutual Funds

By

Structure By Nature


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Interval Schemes: Interval Schemes are that scheme, which combines the features of open-ended

and close-ended schemes. The units may be traded on the stock exchange or may be open for

sale or redemption during pre-determined intervals at NAV related prices.

Overview of existing schemes existed in mutual fund category: BY NATURE

Equity fund: These funds invest a maximum part of their corpus into equities holdings. The

structure of the fund may vary different for different schemes and the fund managers outlook on

different stocks. The Equity Funds are sub-classified depending upon their investment objective,

as follows:

-Diversified Equity Funds

-Mid-Cap Funds

-Sector Specific Funds

-Tax Savings Funds (ELSS)

Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-

return matrix.

Debt funds: The objective of these Funds is to invest in debt papers. Government authorities,

private companies, banks and financial institutions are some of the major issuers of debt papers.

By investing in debt instruments, these funds ensure low risk and provide stable income to the

investors.

Gilt Funds: Invest their corpus in securities issued by Government, popularly known as

Government of India debt papers. These Funds carry zero Default risk but are associated withInterest Rate risk. These schemes are safer as they invest in papers backed by Government.

Income Funds: Invest a major portion into various debt instruments such as bonds, corporate

debentures and Government securities.


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Monthly income plans ( MIPs): Invests maximum of their total corpus in debt instruments while

they take minimum exposure in equities. It gets benefit of both equity and debt market. These

scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.

Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds

primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers

(CPs). Some portion of the corpus is also invested in corporate debentures.

Liquid Funds: Also known as Money Market Schemes, These funds provides easy liquidity and

preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-

bank call money market, CPs and CDs. These funds are meant for short-term cash management

of corporate houses and are meant for an investment horizon of 1day to 3 months. Theseschemes rank low on risk-return matrix and are considered to be the safest amongst all categories

of mutual funds.

Balanced funds: They invest in both equities and fixed income securities, which are in line with

pre-defined investment objective of the scheme. These schemes aim to provide investors with the

best of both the worlds. Equity part provides growth and the debt part provides stability in

returns.

Further the mutual funds can be broadly classified on the basis of investment parameter. It means

each category of funds is backed by an investment philosophy, which is pre-defined in the

objectives of the fund. The investor can align his own investment needs with the funds objective

and can invest accordingly

By investment objective:

Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemesis to provide capital appreciation over medium to long term. These schemes normally invest a

major part of their fund in equities and are willing to bear short-term decline in value for possible

future appreciation.


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Income Schemes: Income Schemes are also known as debt schemes. The aim of these schemes is

to provide regular and steady income to investors. These schemes generally invest in fixed

income securities such as bonds and corporate debentures. Capital appreciation in such schemes

may be limited.

Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically

distributing a part of the income and capital gains they earn. These schemes invest in both shares

and fixed income securities, in the proportion indicated in their offer documents.

Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of

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

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

Other schemes

Tax Saving Schemes:

Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to

time. Under Sec.80C of the Income Tax Act, contributions made to any Equity Linked Savings

Scheme (ELSS) are eligible for rebate.

Index Schemes:

Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex

or the Nifty 50. The portfolio of these schemes will consist of only those stocks that constitute

the index. The percentage of each stock to the total holding will be identical to the stocks index

weightage. And hence, the returns from such schemes would be more or less equivalent to those

of the Index.


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Sector Specific Schemes:

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

specified in the offer documents. Ex- Pharmaceuticals, Software, Fast Moving Consumer Goods

(FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of

the respective sectors/industries. While these funds may give higher returns, they are more risky

compared to diversified funds. Investors need to keep a watch on the performance of those

sectors/industries and must exit at an appropriate time.

VI. Advantages of Mutual FundsDiversificationIt can help an investor diversify their portfolio with a minimum investment. Spreading

investments across a range of securities can help to reduce risk. A stock mutual fund, for example,

invests in many stocks .This minimizes the risk attributed to a concentrated position. If a few securities in

the mutual fund lose value or become worthless, the loss maybe offset by other securities that appreciate

in value. Further diversification can be achieved by investing in multiple funds which invest in different

sectors.

Professional Management- Mutual funds are managed and supervised by investment

professional. These managers decide what securities the fund will buy and sell. This eliminates

the investor of the difficult task of trying to time the market.

Well regulated- Mutual funds are subject to many government regulations that protect investors

from fraud.

Liquidity- It's easy to get money out of a mutual fund.

Convenience- we can buy mutual fund sharesby mail, phone, or over the Internet.

Low cost- Mutual fund expenses are often no more than 1.5 percent of our investment. Expenses

for Index Funds are less than that, because index funds are not actively managed. Instead, they

automatically buy stockin companies that are listed on a specific index
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Transparency- The mutual fund offer document provides all the information about the fund and the

scheme. This document is also called as the prospectus or the fund offer document, and is very detailed

and contains most of the relevant information that an investor would need.

Choice of schemesthere are different schemes which an investor can choose from according to

his investment goals and risk appetite.

Tax benefits An investor can get a tax benefit in schemes like ELSS (equity linked saving

scheme)

VII. Terms used in M utual FundAsset Management Company (AMC)

An AMC is the legal entity formed by the sponsor to run a mutual fund. The AMC is usually a private

limited company in which the sponsors and their associates or joint venture partners are the shareholders.

The trustees sign an investment agreement with the AMC, which spells out the functions of the AMC. It

is the AMC that employs fund managers and analysts, and other personnel. It is the AMC that handles all

operational matters of a mutual fund from launching schemes to managing them to interacting with

investors.

Fund Offer document

The mutual fund is required to file with SEBI a detailed information memorandum, in a prescribed format

that provides all the information about the fund and the scheme. This document is also called as the

prospectus or the fund offer document, and is very detailed and contains most of the relevant information

that an investor would need

Trust

The Mutual Fund is constituted as a Trust in accordance with the provisions of the Indian Trusts Act,

1882 by the Sponsor. The trust deed is registered under the Indian Registration Act, 1908. The Trust

appoints the Trustees who are responsible to the investors of the fund.
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Trustees

Trustees are like internal regulators in a mutual fund, and their job is to protect the interests of the unit

holders. Trustees are appointed by the sponsors, and can be either individuals or corporate bodies. In

order to ensure they are impartial and fair, SEBI rules mandate that at least two-thirds of the trustees be

independent, i.e., not have any association with the sponsor.

Trustees appoint the AMC, which subsequently, seeks their approval for the work it does, and reports

periodically to them on how the business being run.

Custodian

A custodian handles the investment back office of a mutual fund. Its responsibilities include receipt and

delivery of securities, collection of income, distribution of dividends and segregation of assets between

the schemes. It also track corporate actions like bonus issues, right offers, offer for sale, buy back and

open offers for acquisition. The sponsor of a mutual fund cannot act as a custodian to the fund. This

condition, formulated in the interest of investors, ensures that the assets of a mutual fund are not in the

hands of its sponsor. For example, Deutsche Bank is a custodian, but it cannot service Deutsche Mutual

Fund, its mutual fund arm.

NAV

Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is

the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.The

NAV is usually calculated on a daily basis. In terms of corporate valuations, the book values of assets less

liability.

The NAV is usually below the market price because the current value of the funds assets is higher than

the historical financial statements used in the NAV calculation.

Market Value of the Assets in the Scheme + Receivables + Accrued Income

- Liabilities - Accrued Expenses

NAV = ------------------------------------------------------------------------------------------------

No. of units outstanding


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Where,

Receivables: Whatever the Profit is earned out of sold stocks by the Mutual fund is called Receivables.

Accrued Income: Income received from the investment made by the Mutual Fund.

Liabilities: Whatever they have to pay to other companies are called liabilities.

Accrued Expenses: Day to day expenses such as postal expenses, Printing, Advertisement Expenses etc.

Calculation of NAV

Scheme ABN

Scheme Size Rs. 5, 00, 00,000 (Five Crores)

Face Value of Units Rs.10/-

Scheme Size 5, 00, 00,000

--------------------------- = ------------------- = 50, 00,000

Face value of units 10

The fund will offer 50, 00,000 units to Public.

Investments: Equity shares of Various Companies.

Market Value of Shares is Rs.10, 00, 00,000 (Ten Crores)

Rs. 10, 00, 00,000

NAV = -------------------------- = Rs.20/-

50, 00,000 units


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Thus each unit of Rs. 10/- is Worth Rs.20/-

It states that the value of the money has appreciated since it is more than the face value.

Sale price

Is the price we pay when we invest in a scheme. Also called Offer Price. It may include a sales load.

Repurchase price

Is the price at which units under open-ended schemes are repurchased by the Mutual Fund. Such prices

are NAV related

Redemption Price

Is the price at which close-ended schemes redeem their units on maturity. Such prices are NAV related

Sales load

Is a charge collected by a scheme when it sells the units. Also called, Front -end load. Schemes that do

not charge a load are called No Load schemes.

Repurchase or Back-end Load

Is a charge collected by a scheme when it buys back the units from the unit holders


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CAGR (compounded annual growth rate)

The year-over-year growth rate of an investment over a specified period of time. The compound

annual growth rate is calculated by taking the nth root of the total percentage growth rate, where

n is the number of years in the period being considered.

VIII. Fund ManagementActively managed funds:

Mutual Fund managers are professionals. They are considered professionals because of their

knowledge and experience. Managers are hired to actively manage mutual fund portfolios.

Instead of seeking to track market performance, active fund management tries to beat it. To do

this, fund managers "actively" buy and sell individual securities. For an actively managed fund,

the corresponding index can be used as a performance benchmark.

Is an active fund a better investment because it is trying to outperform the market? Not

necessarily. While there is the potential for higher returns with active funds, they are more

unpredictable and more risky. From 1990 through 1999, on average, 76% of large cap actively


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managed stock funds actually underperformed the S&P 500. (Source - Schwab Center for

Investment Research)

Acti vely managed fund styles:

Some active fund managers follow an investing "style" to try and maximize fund performance

while meeting the investment objectives of the fund. Fund styles usually fall within the following

three categories.

Fund Styles:

Value: The manager invests in stocks believed to be currently undervalued by themarket.

Growth: The manager selects stocks they believe have a strong potential for beating themarket.

Blend: The manager looks for a combination of both growth and value stocks.

To determine the style of a mutual fund, consult the prospectus as well as other sources thatreview mutual funds. Don't be surprised if the information conflicts. Although a prospectus may

state a specific fund style, the style may change. Value stocks held in the portfolio over a period

of time may become growth stocks and vice versa. Other research may give a more current and

accurate account of the style of the fund.

Passively Managed F unds:

Passively managed mutual funds are an easily understood, relatively safe approach to investingin broad segments of the market. They are used by less experienced investors as well as

sophisticated institutional investors with large portfolios. Indexing has been called investing on

autopilot. The metaphor is an appropriate one as managed funds can be viewed as having a pilot

at the controls. When it comes to flying an airplane, both approaches are widely used.
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a high percentage of investment professionals, find index investing compelling for the

following reasons:

Simplicity. Broad-based market index funds make asset allocation and diversification easy. Management quality. The passive nature of indexing eliminates any concerns about human error

or management tenure.

Low portfolio turnover. Less buying and selling of securities means lower costs and fewer taxconsequences.

Low operational expenses. Indexing is considerably less expensive than active fundmanagement.

Asset bloat. Portfolio size is not a concern with index funds. Performance. It is a matter of record that index funds have outperformed the majority of managed

funds over a variety of time periods.

You make money fr om your mutual fund investment when:

The fund earns income on its investments, and distributes it to you in the form ofdividends.

The fund produces capital gains by selling securities at a profit, and distributes thosegains to you.

You sell your shares of the fund at a higher price than you paid for them

IX. RiskEvery type of investment, including mutual funds, involves risk. Risk refers to the possibility

that you will lose money (both principal and any earnings) or fail to make money on an

investment. A fund's investment objective and its holdings are influential factors in determining

how risky a fund is. Reading the prospectus will help you to understand the risk associated with

that particular fund.
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Generally speaking, risk and potential return are related. This is the risk/return trade-off. Higher

risks are usually taken with the expectation of higher returns at the cost of increased volatility.

While a fund with higher risk has the potential for higher return, it also has the greater potential

for losses or negative returns. The school of thought when investing in mutual funds suggeststhat the longer your investment time horizon is the less affected you should be by short-term

volatility. Therefore, the shorter your investment time horizon, the more concerned you should

be with short-term volatility and higher risk.

Defining Mutual fund risk

Different mutual fund categories as previously defined have inherently different risk

characteristics and should not be compared side by side. A bond fund with below-average risk,

for example, should not be compared to a stock fund with below average risk. Even though both

funds have low risk for their respective categories, stock funds overall have a higher risk/return

potential than bond funds.

Of all the asset classes, cash investments (i.e. money markets) offer the greatest price stability

but have yielded the lowest long-term returns. Bonds typically experience more short-term priceswings, and in turn have generated higher long-term returns. However, stocks historically have

been subject to the greatest short-term price fluctuationsand have provided the highest long-

term returns. Investors looking for a fund which incorporates all asset classes may consider a

balanced or hybrid mutual fund. These funds can be very conservative or very aggressive. Asset

allocation portfolios are mutual funds that invest in other mutual funds with different asset

classes. At the discretion of the manager(s), securities are bought, sold, and shifted between

funds with different asset classes according to market conditions.

Mutual funds face risks based on the investments they hold. For example, a bond fund faces

interest rate risk and income risk. Bond values are inversely related to interest rates. If interest

rates go up, bond values will go down and vice versa. Bond income is also affected by the

change in interest rates. Bond yields are directly related to interest rates falling as interest rates


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fall and rising as interest rise. Income risk is greater for a short-term bond fund than for a long-

term bond fund.

Similarly, a sector stock fund (which invests in a single industry, such as telecommunications) is

at risk that its price will decline due to developments in its industry. A stock fund that invests

across many industries is more sheltered from this risk defined as industry risk.

Following is a glossary of some risks to consider when investing in mutual funds.

Call Risk. The possibility that falling interest rates will cause a bond issuer to redeemor callits high-yielding bond before the bond's maturity date

Country Risk. The possibility that political events (a war, national elections), financialproblems (rising inflation, government default), or natural disasters (an earthquake, a

poor harvest) will weaken a country's economy and cause investments in that country to

decline.

Credit Risk. The possibility that a bond issuer will fail to repay interest and principal ina timely manner. Also called default risk.

Currency Risk. The possibility that returns could be reduced for Americans investing inforeign securities because of a rise in the value of the U.S. dollar against foreign

currencies. Also called exchange-rate risk.

Income Risk. The possibility that a fixed-income fund's dividends will decline as a resultof falling overall interest rates.

Industry Risk. The possibility that a group of stocks in a single industry will decline inprice due to developments in that industry.


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X. Basis Of Compari son Of Var ious Schemes Of Mutual F unds

Beta

Beta measures the sensitivity of the stock to the market. For example if beta=1.5; it means the stock price

will change by 1.5% for every 1% change in Sensex. It is also used to measure the systematic risk.

Systematic risk means risks which are external to the organization like competition, government policies.

They are non-diversifiable risks.

Beta is calculated using regression analysis, Beta can also be defined as the tendency of a security's

returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with

the market. A beta less than 1 means that the security will be less volatile than the market. A beta greater

than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's

beta is 1.2, it's theoretically 20% more volatile than the market.

Beta>11thenxaggressivexstocks

If1beta


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Alpha

Alpha takes the volatility in price of a mutual fund and compares its risk adjusted performance to a

benchmark index. The excess return of the fund relative to the returns of benchmark index is a

fundamental ALPHA. It is calculated as a return which is earned in excess of the return generated by

CAPM. Alpha is often considered to represent the value that a portfolio manager adds to or subtracts from

a fund's return. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%.

Correspondingly, a similar negative alpha would indicate underperformanceof 1%. .

If a CAPM analysis estimates that a portfolio should earn 35% return based on the risk of the portfolio but

the portfolio actually earns 40%, the portfolio's alpha would be 5%. This 5% is the excess return over

what was predicted in the CAPM model. This 5% is ALPHA.

Sharpe Ratio

A ratio developed by Nobel Laureate Bill Sharpe to measure risk-adjusted performance. It is calculated by

subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard

deviation of the portfolio returns.

The Sharpe ratio tells us whether the returns of a portfolio are because of smart investment decisions or a

result of excess risk. This measurement is very useful because although one portfolio or fund can reap

higher returns than its peers, it is only a good investment if those higher returns do not come with too

much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has

been.


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Treynor Ratio

The treynor ratio, named after Jack Treynor, is similar to the Sharpe ratio, except that the risk measure

used is Beta instead of standard deviation. This ratio thus measures reward to volatility.

Treynor Ratio = (Return from the investment Risk free return) / Beta of the

investment.

The scheme with the higher treynor Ratio offers a better risk-reward equation for the investor.

Since Treynor Ratio uses Beta as a risk measure, it evaluates excess returns only with respect to

systematic (or market) risk. It will therefore be more appropriate for diversified schemes, where the non-

systematic risks have been eliminated. Generally, large institutional investors have the requisite funds to

maintain such highly diversified portfolios.

Also since Beta is based on capital asset pricing model, which is empirically tested for equity, Treynor

Ratio would be inappropriate for debt schemes.

M- SQUARED

Modigliani and Modigliani recognized that average investors did not find the Sharpe ratio intuitive and

addressed this shortcoming by multiplying the Sharpe ratio by the standard deviation of the excess returns

on a broad market index, such as the S&P 500 or the Wilshire 5000, for the same time period. This yields

the risk-adjusted excess return. This, too, is a significant and useful statistic, as it measures the return in

excess of the risk-free rate, which is the basis from which all risky investments should be measured.

MSquared= [ (RiRf)/ Sd. Inv] * Sd. Mkt + Rf


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OR

MSquared= Sharpe Ratio* Sd. Mkt + Rf

Ri = Return from the investment

Rf = Risk free return

Sd. Inv= Standard Deviation Investment

Sd. Mkt= Standard Deviation Market

Leverage Factor:

It reports the comparison of the total risk in the fund with the total risk in the market portfolio

and can be used in making investment decisions. It is calculated by dividing market standard

deviation by the fund standard deviation.

Li = Standard deviation of the market

Standard deviation of the fund

for example a leverage factor greater than one implies that standard deviation of the fund is less

than standard deviation of the market index, and that the investor should consider levering the

fund by borrowing money and invest in that particular fund. while this would tend to increase the

risk of investment somewhat ,there would be an greater than proportional increase in returns. On

the other hand leverage factor less than one implies that the risk of fund is greater than risk of

market index and the investor should consider unlevering the fund by selling of the part of the

holding in the fund and investing the proceeds I a risk free security, such as treasury bill in this

way returns on the investment reduce somewhat, there would be an greater than proportional

reduction in risk.


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Standard Deviation:

A measure of the dispersion of a set of data from its mean. The more spread apart the data is, the higherthe deviation. Standard deviation is applied to the annual rate of return of an investment to measure the

investment's volatility (risk).

A volatile stock would have a high standard deviation. The standard deviation tells us how much the

return on the fund is deviating from the expected normal returns.

Standard deviation can also be calculated as the square root of the variance.

XI. How To Pick The Right Mutual FundI denti fying Goals and Risk Tolerance

Before acquiring shares in any fund, an investor must first identify his or her goals and desires for the

money being invested. Are long-term capital gains desired, or is a current income preferred? Will the

money be used to pay for college expenses, or to supplement a retirement that is decades away. One

should consider the issue of risk tolerance. Is the investor able to afford and mentally accept dramatic

swings in portfolio value? Or, is a more conservative investment warranted? Identifying risk tolerance is

as important as identifying a goal. Finally, the time horizon must be addressed. Investors must think about

how long they can afford to tie up their money, or if they anticipate any liquidity concerns in the near

future. Ideally, mutual fund holders should have an investment horizon with at least five years or more.

Style and Fund Type

If the investor intends to use the money in the fund for a longer term need and is willing to assume a fair

amount of risk and volatility, then the style/objective he or she may be suited for is a fund. These types of

funds typically hold a high percentage of their assets in common stocks, and are therefore considered to
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be volatile in nature. Conversely, if the investor is in need of current income, he or she should acquire

shares in an income fund. Government and corporate debt are the two of the more common holdings in an

income fund. There are times when an investor has a longer term need, but is unwilling or unable to

assume substantial risk. In this case, a balanced fund, which invests in both stocks and bonds, may be the

best alternative.

Char ges and Fees

Mutual funds make their money by charging fees to the investor. It is important to gain an understanding

of the different types of fees that you may face when purchasing an investment.

Some funds charge a sales fee known as a load fee, which will either be charged upon initial investment

or upon sale of the investment. A front-end load/fee is paid out of the initial investment made by the

investor while a back-end load/fee is charged when an investor sells his or her investment, usually prior to

a set time period. To avoid these sales fees, look for no-load funds, which don't charge a front- or back-

end load/fee. However, one should be aware of the other fees in a no-load fund, such as the

management expense ratio and other administration fees, as they may be very high.

The investor should look for the management expense ratio. The ratio is simply the total percentage of

fund assets that are being charged to cover fund expenses. The higher the ratio, the lower the investor's

return will be at the end of the year.

Evaluati ng Managers/Past Resul ts

Investors should research a fund's past results. The following is a list of questions that perspective

investors should ask themselves when reviewing the historical record:

Did the fund manager deliver results that were consistent with general market returns? Was the fund more volatile than the big indexes (it means did its returns vary dramatically

throughout the year)?

This information is important because it will give the investor insight into how the portfolio manager

performs under certain conditions, as well as what historically has been the trend in terms of turnover and

return. Prior to buying into a fund, one must review the investment company's literature to look for

information about anticipated trends in the market in the years ahead.
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Size of the Fund

Although, the size of a fund does not hinder its ability to meet its investment objectives. However, there

are times when a fund can get too big. For example - Fidelity's Magellan Fund. Back in 1999 the fund

topped $100 billion in assets, and for the first time, it was forced to change its investment process to

accommodate the large daily (money) inflows. Instead of being nimble and buying small and mid cap

stocks, it shifted its focus primarily toward larger capitalization growth stocks. As a result, its

performance has suffered.

Fund Tr ansactional Activity

Portfolio Turnover

Measure of how frequently assets within a fund are bought and sold by the managers. Portfolio

turnover is calculated by taking either the total amount of new securities purchased or the amount of

securities sold -whichever is less - over a particular period, divided by the total net asset value (NAV) of

the fund. The measurement is usually reported for a 12-month time period

Fund Perf ormance Metrics

Historical Performance

The investor should see the past returns of the fund and should compare it with the peer group fund.

Whatever the objective, the mutual fund is an excellent medium to accumulate financial assets and grow

them over time to achieve any of these goals.

4. Systematic Investment Plan (SIP)

SIP is similar to a Recurring Deposit. Every month on a specified date an amount you choose is invested in

a mutual fund scheme of your choice. The dates currently available for SIPs are the 1st, 5th, 10th, 15th,

20th and the 25th of a month. There are many benefits of investing through SIP.
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Benefit 1

Become A Disciplined Investor

Being disciplined - Its the key to investing success. With the Systematic Investment Plan you commit an

amount of your choice (minimum of Rs. 500 and in multiples of Rs. 100 thereof*) to be invested every

month in one of our schemes.

Think of each SIP payment as laying a brick. One by one, youll see them transform into a building. Youll

see your investments accrue month after month. Its as simple as giving at least 6 postdated monthly

cheques to us for a fixed amount in a scheme of your choice. Its the perfect solution for irregular

investors.

Benefit 2

Reach Your Financial Goal

Imagine you want to buy a car a year from now, but you dont know where the down-payment will come

from. SIP is a perfect tool for people who have a specific, future financial requirement. By investing an

amount of your choice every month, you can plan for and meet financial goals, like funds for a childs

education, a marriage in the family or a comfortable postretirement life.

Benefit 3

Take Advantage of Rupee Cost Averaging

Most investors want to buy stocks when the prices are low and sell them when prices are high. But timing

the market is timeconsuming and risky. A more successful investment strategy is to adopt the method

called Rupee Cost Averaging. We can reap this benefit by investing the amounts through a SIP .

Benefit 4

Grow Your Investment With Compounded Benefits

It is far better to invest a small amount of money regularly, rather than save up to make one large

investment. This is because while you are saving the lump sum, your savings may not earn much interest.

With HDFC MF SIP, each amount you invest grows through compounding benefits as well. That is, the


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interest earned on your investment also earns interest. The following example illustrates this.

Imagine Neha is 20 years old when she starts working. Every month she saves and invests Rs. 5,000 till

she is 25 years old. The total investment made by her over 5 years is Rs. 3 lakhs.Arjun also starts working

when he is 20 years old. But he doesnt invest monthly. He gets a large bonus of Rs. 3 lakhs at 25 and

decides to invest the entire amount.

Both of them decide not to withdraw these investments till they turn 50. At 50, Nehas Investments have

grown to Rs. 46,68,273* whereas Arjuns investments have grown to Rs. 36,17,084*. Nehas small

contributions to a SIP and her decision to start investing earlier than Arjun have made her wealthier by

over Rs. 10 lakhs.

*Figures based on 10% p.a. interest compounded monthly.

Benefit 5

Do All This Effortlessly

Investing with SIP is easy. Simply give us post-dated cheques or opt for an Auto Debit from your bank

account for an amount of your choice (minimum of Rs. 500 and in multiples of Rs. 100 thereof*) and well

invest the money every month in a fund of your choice. The plans are completely flexible. You can invest

for a minimum of six months, or for as long as you want. You can also decide to invest quarterly and will

need to invest for a minimum of two quarters.

All you have to do after that is sit back and watch your investments accumulate

5. Portfolio Rebalancing

Rebalancing is defined as the periodic adjustment of a portfolio to restore the original asset

allocation mix of your mutual fund portfolio. If an investor's investment strategy or risk

threshold has changed, he can rebalance his investments so that asset classes in the portfolio

align with his new asset allocation plan. It is the process of selling assets that are performing well
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and buying assets that are underperforming. Portfolio rebalancing is one of the very few ways to

generate additional returns for a portfolio without incurring any additional risk.

Ex-if there is a portfolio with a 50%stocks / 50% bonds policy asset mix.

If stocks return 25% return while bonds produce a 5% return, stocks become overweighed at the

end of the year (54% vs. 46%). Rebalancing involves selling 4% in stocks and buying 4% in

bonds to bring the asset mix back to the desired 50/50 asset mix.

One of a very important step before rebalancing is to assign a strategic asset allocation plan appropriate to

risk profile, investment goals and time horizon.

Rebalancing in volatile market

In rising stock markets, people often take on more risk than they're suited for ,as a result of which, they

ended up with a larger percentage of stocks in their portfolios than their risk levels warranted, Many even

added to their already over weighted positions by buying more and more, assuming the stellar

performance trend would continue indefinitely, but when the market began a sharp fall in 2000, their

investments were poundedmore than they likely expected and more than if had they rebalanced.


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Rebalancing effects

Financial Research studied a portfolio of 60% stocks and 40% bonds to see what would happen if no

rebalancing took place. As the stock market performed well from 1994 to 1999, the portfolio's 60% stock

allocation grew to nearly 80%. This portfolio became over weighted in stocks just in time for the 2000

bear market

Without rebalancing, a portfolio in the 1990s became too aggressive

but the same mix of 60% stocks and 40% bonds, starting in 2000. This time, the stock market was falling.

By 2002, the portfolio's allocation had flipped, consisting of 40% stocks and 60% bonds.

Without rebalancing, a portfolio in the 2000s became too conservative


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The value of regular rebalancing

A regular rebalancing plan helps instill discipline in investing process. In most cases, a rebalanced

portfolio had lower risk and similar to slightly higher returns. The chart below shows what happened

when we rebala

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