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DISSERTATION ON
“RECENT TRENDS IN MUTUAL FUNDS”
SUBMITTED BY:
SUNIL KUMAR YADAV
BBA 2007-2010
Semester-VI
Enrollment no-A7006407046
UNDER GUIDENCE OF:
Dr. Richa Raghuvanshi
ABS, LUCKNOW.
DISSERTATION REPORT IN PARTIAL FULFILLMENT OF THE AWARD OF FULL TIME
BACHELOR OF BUSINESS ADMINISTRATION (2007-10))
AMITY BUSINESS SCHOOL
AMITY UNIVERSITY UTTAR PRADESH LUCKNOW
AMITY UNIVERSITY UTTAR PRADESH
Lucknow Campus
Amity Business School
STUDENT’S CERTIFICATE
Certified that this report is prepared based on the Dissertation project undertaken by me on
the topic “RECENT TRENDS IN MUTUAL FUNDS” under the able guidance of
Lecturer Dr. Richa Raghuvanshi in partial fulfillment of the requirement for award of
degree of Bachelor of Business Administration from Amity University Uttar Pradesh.
Date: ___________________
Signature Signature Signature
Name:- Sunil Kr. Yadav Name: -Dr. Richa Raghuvanshi Name: Prof. R.P Singh
Student Faculty Guide Director ABS.
2
FACULTY GUIDE’S CERTIFICATE
Certified that this report is prepared based on the Dissertation project undertaken by Sunil
Kumar Yadav under my guidance in partial fulfillment of the requirement for award of
degree of Bachelor of Business Administration from Amity University Uttar Pradesh.
This project report is authentic and is an outcome of hard labor of the student. As a faculty
guide I wish him all the best for a bright and a successful future.
Date: ___________________
Signature
Name: - Dr. Richa Raghuvanshi
Faculty Guide
3
Abstract
Over the past decades mutual funds have grown intensely in popularity and have
experienced a considerable growth rate. Mutual funds are popular because they make it
easy for small investors to invest their money in a diversified pool of securities. As the
mutual fund industry has evolved over the years, there have arisen many questions
about the nature of operations. This Report on Mutual Funds‘ provides an in-depth
coverage of the mutual fund industry and its operations in an interactive format. It is
intended to familiarize with the basic concepts related to mutual funds. The Report
first provides the fundamentals, explaining what mutual funds are and how they work.
Recent trends in Mutual funds have also been shown. Data Analysis of Indian Large-
Cap Mutual fund market has been done to give a comparative analysis of the top 6
funds in the category. Various factors surrounding the performance of these mutual
funds are then highlighted along with a brief of various applications. Finally, the report
depicts the conclusion.
4
ACKNOWLEDGEMENT
In preparing this dissertation report a considerable amount of thinking and informational
inputs from various sources were involved. I express my deep sense of gratitude to
Dr.Richa Raghuvanshi, my faculty guide for her excellent spirit, effective guidance,
encouragement and constant criticism, which gave me the confidence to complete the term
paper effectively. In spite of having a very busy schedule, she made sure in every way that I
acquire the best possible exposure and knowledge during my preparation of research report
under her guidance. Shee gave all the time and attention, which I needed to complete my
research and compile my term paper in as much orderly way as possible.
I am also thankful to all those people, who are directly or indirectly associated
with the timely completion my term paper, without which I otherwise would not have able to
complete my dissertation report.
Sunil Kumar Yadav
BBA , Semester VI
(2007-2010)
5
TABLE OF CONTENTS
Abstract
Chapter 1 – Introduction
1.1Objective of the study
1.2Scope of the study
1.3Need of the study
1.4Limitation of the study
Chapter -2 History And Growth Of Mutual Fund
2.1 Definition and evolution
2.2 How an Investor can earn through MFs
2.3 Characteristics of Mutual Fund
2.4 Critical views about MF
2.5 Types of Mutual Funds
2.6 Structure of Mutual Funds
2.7 Other Types of Investment Companies
2.8 Performance Measures Of Mutual Funds
Chapter 3- Company Profile
Chapter 4– Research Methodology
Chapter 5 – Recent Trends in Mutual Funds
Chapter 6 – Conclusion
Chapter7 – Bibliography
6
Chapter-1
INTRODUCTION
7
Objective of the study
To understand the different aspects of Mutual Fund.
To understand the limitations and benefits of investment in Mutual Fund.
Analysis of Mutual fund portfolios for different type of investor.
Recent trend and development in the field of Mutual fund.
SCOPE OF THE STUDY
A large number of players have entered the market and trying to gain market share in this
rapidly improving market. Hence there is a need for every company to understand the needs
and wants of the investor. Understanding the investor perception of risk is one of the methods
to identify the preferences of the investor.
The study will be helpful to know the investors perception of risk of mutual fund products.
This project report may be helpful for the company to device or alter their sales promotion
strategies for various mutual fund products.
NEED OF THE STUDY
Mutual fund is a retail product designed to target small investors, salaried people and others
who are intimated by the stock market but nevertheless, like to reap the benefits of stock
market investing. Investors are a highly heterogeneous group. Hence there is a need to design
products to their expectation. Hence understanding the risk perception of investors is an
important attribute to determine their expectation.
8
LIMITATIONS OF THE STUDY
The project has certain limitations that were unavoidable. The limitations fall beyond the
control of the researcher while collecting and analyzing the data.
Analysis and interpretation of results depends only on the data obtained
from websites and journals.
Only a sample of sources has been taken for the study.
Some of the information on internet may be biased.
9
CHAPTER-2
HISTORY
AND GROWTH
OF MUTUAL FUND
10
DEFINITION
Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned
through these investments and the capital appreciation realized is shared by its unit
holders in proportion to the number of units owned by them. Thus a Mutual Fund is
the most suitable investment for the common man as it offers an opportunity to invest
in a diversified, professionally managed basket of securities at a relatively low cost.
The flow chart below describes broadly the working of a mutual fund.
Mutual funds invest in three broad categories of financial assets:
1. Stock: Equity and equity related instrument.
2. Bond: Debt instruments that have a maturity of more then one year.
3. cash : Debt instrument that have a maturity of less then one year
and bank deposit.
As per the US Securities and Exchange Commission, a mutual fund is a company that pools
money from many investors and invests the money in stocks, bonds, short-term money-
market instruments, other securities or assets, or some combination of these investments. The
combined holdings which the mutual fund owns are known as its portfolio. Each share
represents an investor's proportionate ownership of the fund's holdings and the income those
holdings generate. Mutual funds have a fund manager who invests the money on behalf of the
investors by buying / selling stocks, bonds etc. Currently, the worldwide value of all mutual
funds totals more than $US 26 trillion. The United States leads with the number of mutual
fund schemes. There are more than 8000 mutual fund schemes in the U.S.A.
11
(i)-MUTUAL FUNDS
Mutual Fund Operation Flow Chart
(ii) ORGANISATION OF A MUTUAL FUND There are many entities involved and the diagram below
illustrates the oganisational set up of a mutual fund
12
13
ADVANTAGES OF MUTUAL FUNDS
The advantages of investing in a Mutual Fund are:
Professional Management
Diversification
Convenient Administration
Return Potential
Low Costs
Transparency
Choice of schemes
Tax benefits
(iii)
VARIOUS MUTUAL FUND SCHEMES
Equity/Growth Schemes
The aim of growth funds is to provide capital appreciation over the medium to long-
term. Such schemes normally invest a major part of their corpus in equities. Such
14
funds have comparatively high risks. These schemes provide different options to the
investors like dividend option, capital appreciation, etc. and the investors may choose
an option depending on their preferences.
Debt/Income Schemes
The aim of income funds is to provide regular and steady income to investors. Such
schemes generally invest in fixed income securities such as bonds, corporate
debentures, Government securities and
Money market instruments. Such funds are less risky compared to equity schemes.
These funds are not affected because of fluctuations in equity markets..
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. e.g. 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.
Types of Mutual funds
There are more than 10,000 mutual funds in North America, each having different risks and
rewards. Each fund has a predetermined investment objective that tailors the fund's assets,
regions of investments and investment strategies. Most mutual funds fall into one of three
main categories — equity funds (stocks), fixed income funds (bonds), and money market
funds. All mutual funds are variations of these three asset classes. For example, while equity
funds that invest in fast-growing companies are known as growth funds, equity funds that
invest only in companies of the same sector or region are known as specialty funds.
1 Money market mutual funds
It consists of short term debt instruments. These mutual funds carry lower risks than other
mutual funds; in USA such funds can invest only in certain high-quality, short-term
investments issued by the U.S. government, U.S. corporations, and state and local
15
governments. Money market funds don‘t offer very high returns as they try to keep their net
asset value (NAV) — which represents the value of one share in a fund — at a stable $1.00
per share. Loss of principle here is highly unlikely; but the NAV may fall below $1.00 if the
fund's investments perform poorly. Investor losses have been rare, but they are possible.
Inflation risk — the risk that inflation will outpace and erode investment returns over time —
can be a potential concern for investors in money market funds.
16
2 Bond/fixed income funds
Bond funds invest primarily in securities known as bonds. A bond is a type of security that
resembles a loan. When a bond is purchased, money is lent to the company, municipality, or
government agency that issued the bond. In exchange for the use of this money, the issuer
promises to repay the amount loaned (the principal; also known as the face value of the bond)
on a specific maturity date. In addition, the issuer typically promises to make periodic interest
payments over the life of the loan.
A bond fund share represents ownership in a pool of bonds and other securities comprising
the fund‘s portfolio. Although there have been past exceptions, bond funds tend to be less
volatile than stock funds and often produce regular income. For these reasons, investors often
use bond funds to diversify, provide a stream of income, or invest for intermediate-term
goals. Like stock funds, bond funds have risks and can make or lose money.
Types of Risk
After a bond is first issued, it may be traded. If a bond is traded before it matures, it may be
worth more or less than the price paid for it. The price at which a bond is traded can be
affected by several types of risk.
Credit Risk:It refers to the risk of loss of principal or loss of a financial reward resulting
from a borrower's failure to repay a loan or otherwise meet a contractual obligation. It is
lower for funds investing in insured or Treasury bonds and higher for those investing in junk
bonds.
Interest Rate Risk: The risk that the market value of the bonds will go down when interest
rates go up. Because of this, an investor can lose money in any bond fund, including those
that invest only in insured bonds or Treasury bonds. Funds that invest in longer-term bonds
tend to have higher interest rate risk.
17
Prepayment Risk: The chance that a bond will be paid off early. For example, if interest
rates fall, a bond issuer may decide to pay off (or "retire") its debt and issue new bonds that
pay a lower rate. When this happens, the fund may not be able to reinvest the proceeds in an
investment with as high a return or yield.
3 Stock funds
It represents the largest category of mutual funds; its objective is long term capital growth
since historically, stocks have done better than other types of investments over the long term.
Overall "market risk" poses the greatest potential danger for investors in stocks funds. Stock
prices can fluctuate for a broad range of reasons — such as the overall strength of the
economy or demand for particular products or services. Stock funds are of different types,
some of which are given below:
Growth funds focus on stocks that may not pay a regular dividend but have the potential for
large capital gains.
Income funds invest in stocks that pay regular dividends.
Index funds aim to achieve the same return as a particular market index, such as the S&P
500 Composite Stock Price Index, by investing in all — or perhaps a representative sample
— of the companies included in an index.
Specialty funds invest only in companies of the same sector or region.
Sector funds may specialize in a particular industry segment, such as technology or
consumer products stocks.
18
Money Market Funds
Funds invest insecurities of short term nature which generally means securities of less
than one year maturity.The typical short term interest bearing instruments these funds
invest in Treasury Bills issued by governments, Certificate of Deposits issued by
banks and Commercial Paper issued by companies.The major strengths of money
market funds are the liquidity and safety of principal that the investors can normally
expect from short term investments.
Gilt Funds
Gilts are the governments securities with medium to long term maturities typically of
over one year (under one year instruments being money market securities ). In India,
we have now seen the emergence of government securities or gilt funds that invest in
government paper called dated securities. Since the issuer is the government ,these
funds have little risk of default and hence offer better protection of principal.
However , investors have to recognize the potential changes in values of debt
securities held by the funds that are caused by changes .in the market price of debt
securities held by the funds that are caused by changes in the market price of debt
securities quoted on the stock exchanges.
.
Debt Funds (Income Funds)
These funds invest in debt instruments issued not only by the governments, but also
by private companies, banks and financial institutions and other entities such as
infrastructure companies. By investing in debt these funds target low risk and stable
income for the investor as their key objectives.
Debt funds are largely considered as income funds as they do not target capital
appreciation, look for high current income and therefore distribute a substantial part
19
of their surplus to investors . The income funds fall largely in the category of debt
funds as they invest primarily in fixed income generating debt instruments
Diversified Debt Fund
A debt fund that invests in all available types of debt securities, issued by entities
across all industries and sectors is properly diversified debt fund. While debt fund
offer high income and less risk as compared to equity funds, investors need to
recognize that debt securities are subject to risk of default by the issuer on
payment of interest or principal. A diversified debt fund has the benefit of risk
reduction through diversification and sharing of any default related losses by a
large number of investors. Hence the diversified debt fund is less risky than the
sect oral funds.
Focused Debt Fund
Some debt funds have a narrower focus, with less diversification in its investment
.Examples include sector ,specialized and off shore debt funds. These are much
similar to the equity funds that these are less income oriented oriented and less
riskier
High Yield Debt Funds
Usually debt funds control the borrower default risk by investing in securities
issued by the borrowers who are rated by the credit rating agencies and are
considered to be of “investment grade”. There are however, high yield debt
funds that seek to obtain higher interest returns by investing in the debt
instruments that are considered “below investment grade”. These funds are
exposed to greater risks.
20
Assured Return Funds – An Indian Variant
Fundamentally ,mutual funds hold assets in trust for investors. All returns and
risks are for account of the investors. The role of the fund manager is to provide
the professional management service and to ensure the highest possible return
consistent with the investment objective of the fund. The fund manager or the
trustees do not give any guarantee of any minimum return to the investor.
However in India, historically the UTI offered assured return to the investor. If
there is any shortfall it will be borne by the sponsor.
While Assured Return funds may certainly be considered to be the lowest risk
type within the debt fund category, they are not entirely risk free, as the investors
normally lock in their funds for the term of scheme or at least a specific period of
time. During this period, changes in the financial market may result in the investor loosing
their money.
Fixed Term Plan Series
A mutual fund would normally be either open ended or close ended . However
in India, mutual funds have evolved an innovative middle option between the two,
in response to the investor needs.
Fixed Term Plan Series are essentially close ended in nature . In that the mutual
fund AMC issues a fixed number of units for each series only for once and closes
the issue after an initial offering period like a close end scheme offering.
However a close ended scheme would normally make a one time initial offering
of units , for a fixed duration generally exceeding a year. Investors have to hold
the units until the end of the stated duration or sell them on a stock exchange if
listed. Fixed Term Plans are close end but usually for shorter term less than a
year . Of course like any close end fund each plan series can be wounded earlier
under certain regulatory conditions.
21
Equity Funds
As investors move from debt funds category to equity funds , they face increased risk
level . However there are a large variety of equity funds and all of them are not
equally risk prone. Investor and their advisors need to sort out and select the right
equity fund that risk appetite.
Equity funds invest a major portion of their corpus in equity shares issued by the
companies, acquired directly in initial public offerings or through the secondary
market . Equity funds would be exposed to the equity price fluctuations risk at the
market level , at the industry or the sector level and the company specific
level .Equity Funds NAV fluctuates with all these price movement. These price
movements are caused by all kinds of external factors, political and social as well
economic. The issuers of equity shares offer no guaranteed repayments in case of debt
instruments. Hence ,equity funds are generally considered at the higher end of the risk
spectrum among all funds available in the market. On the other hand, unlike debt
instruments that offer fixed amounts of repayments , equities can appreciate in value
in line with the issuers’ earning potential and so offer the greatest potential for growth
in capital.
Equity funds adopt different investment strategies resulting in different levels of risk.
Hence they are generally separated into different types in terms of their investment
styles. Some of these equity funds are as under :
Growth Funds
Growth funds invest in companies whose earnings are expected to rise at an average.
These companies may be operating in sectors like technology considered having a
growth potential, but not entirely unproven and speculative. The primary objective of
growth fund is capital appreciation over a span of 3 to 5 years. Growth funds are
therefore les volatile than funds that target aggressive growth.
22
Specialty Funds
These funds have a narrower portfolio orientation and invest only in companies that
meet pre determined criteria. Some funds may build portfolio that will exclude
Tobacco companies. Within the specialty funds category some funds may be broad
based in terms of investments in the portfolio. However most specialty
funds tend to be concentrated funds, since diversification is limited to one type of
investment. Clearly concentrated specialty fund tend to be more volatile than the
diversified funds.
23
Diversified Equity Funds
A fund that seeks to invest only in equities for a very small portion in liquid money
market securities but is not focused on any one or few sectors or shares may be
termed as diversified equity funds. While exposed to all equity risks, diversified
equity funds seek to reduce the sector or stock specific risks through diversifications.
They have mainly market risk exposure. Such general purpose but diversified funds
are clearly at the lower risk level than growth funds.
Equity Linked Savings Scheme
In India the investors have been given tax concessions to encourage them to invest in
equity markets through these special schemes. Investments in these schemes entitles
the investors to claim an income tax rebate, but usually has a lock in period before the
end of which funds cannot be withdrawn. These funds are subject to the general SEBI
investment guidelines for all equity funds and would be in the Diversified Equity
Fund category. However as there are no specific restrictions on which sectors these
funds ought to invest in ,investors should clearly look for where the AMC proposes to
invest and accordingly judge the level of risk involved.
24
Equity Index Funds
An index fund tracks the performance of a specific stock market index. The objective
is to match the performance of the stock market by tracking an index that represents
the overall market. The fund invests in shares that constitutes the index in the same
proportion as the index. Since they generally invests in a diversified market index
portfolio these funds take only the overall market risks while reducing the sector and
the stock specific risks through diversifications.
Value Funds
The growth funds that we reviewed above holds shares of the companies with good or
improving profit prospects and aim primarily at capital appreciation. These
concentrate on future growth prospects may be willing to pay high price/ earnings
multiples for companies considered to have good potential. In contrast to the growth
investing other funds follow Value Investing Approach. Value funds try to seek out
fundamentally sound companies whose shares are currently under priced in the
market. Value funds will add only those shares to their portfolios that are selling at
low price earningratios ,low market to book value ratios and are undervalued by other
yardsticks.
Value funds have the equity market price fluctuation risks, but stand often at a lower
end of the risk spectrum in comparison with the growth funds. Value stocks may be
from a large number of sectors and therefore diversified.
Equity Income Funds
Usually income funds are in the debt funds category, as they target fixed income
investments . However there are equity funds that can be designed to give the
investors a high level of current income along with some steady capital appreciation,
investing mainly in shares of companies with high dividend yields.
25
As an example an equity income fund would invest largely in power/ utility
companies shares of established companies that pay higher dividend and whose price
do not fluctuate as much as the other shares. These equity funds should therefore be
less volatile and less risky than nearly all other equity funds.
Hybrid Funds
We have seen that in terms of the nature of financial securities held, there are three
major mutual fund types :money market , debt and equity. Many mutual fund mix
these different types of securities in their portfolios. Thus, most funds equity or debt
always have some money market securities in their portfolios as these securities offer
the much needed liquidity. However money market holdings will constitute a lower
proportion in the overall portfolios. These are the funds that seek to hold a relatively
balanced holdings of debt or equity in their portfolios. Such funds are termed as
“hybrid funds” as they have a dual equity/ bond focus.
Balanced Funds
A balanced fund is the one that has a portfolio comprising debt instruments,
convertible securities, preference and equity shares. Their assets are generally held in
more or less equal proportion between debt / money market securities and equities. By
investing in a mix of this nature, balanced funds seek to attain the objectives of the
income, moderate capital appreciation and preservation of capital and are ideal for
investors with a conservative and long term orientation.
Growth and Income Funds
Unlike income or growth focused funds ,these funds seek to strike a balance between
capital appreciation and income for the investor. Their portfolios are a mix between
companies with good dividends paying records and those with potential for capital
appreciation. These funds would be less risky than the pure growth funds though more
risky than the income funds.
26
Why Invest in a Mutual Fund?
Mutual funds make saving and investing simple, accessible, and affordable. Mutual fund
offers certain advantages to individual, amateur investors who trade in small denominations.
Professional management: Theoretically, professional money managers research, select
and monitor the performance of the securities the fund purchases. The mutual fund will have
a fund manager that trades the pooled money on a regular basis. Thus investors who don‘t
have the time or expertise to manage their portfolios find MFs convenient as it is a relatively
inexpensive way of getting a full-time manager to make and monitor investments for them.
27
Diversification:Mutual funds typically own several different stocks in many different
industries, sometimes going up to a hundred different stocks in large sized mutual funds. It
enables diversification and spreading of risk by investing in a portfolio of securities
belonging to industries having inversely correlated income streams.
Economies of Scale:Since mutual funds buy and sell a large amount of securities at a time,
its transaction costs are lower than what an individual investor would pay for trading in
securities. Also, because of the ‗pooling‘ of funds, individual investors can make investments
in small denominations in the securities market which is not possible if they invest on their
own.
Liquidity: Just like an individual stock, a mutual fund allows its investors to readily
redeem their shares at the current NAV — plus any fees and charges assessed on redemption
— at any time. The price per share at which the investors can redeem shares is known as the
fund‘s net asset value (NAV). NAV is the current market value of all the fund‘s assets, minus
liabilities, divided by the total number of outstanding shares.
Convenience:An investor can purchase or sell fund shares directly from a fund or through
a broker, financial planner, bank or insurance agent, by mail, over the telephone, and
increasingly by personal computer. He can also arrange for automatic reinvestment or
periodic distribution of the dividends and capital gains paid by the fund. Funds may offer a
wide variety of other services, including monthly or quarterly account statements, tax
information, and 24-hour phone and computer access to fund and account information.
Protecting Investors:Not only are mutual funds subject to compliance with their self-
imposed restrictions and limitations, they are also highly regulated by the federal government
through the U.S. Securities and Exchange Commission (SEC). As part of this government
regulation, all funds must meet certain operating standards, observe strict antifraud rules, and
disclose complete information to current and potential investors. These laws are strictly
enforced and designed to protect investors from fraud and abuse.
28
29
Disadvantages of Mutual funds
Hidden costs: The mutual fund industry tactfully buries costs under layers of jargon. These
costs come despite of negative returns. Examples of such costs include sales charges, annual
fees, and other expenses; and depending on the timing of their investment, investors may also
have to pay taxes on any capital gains distribution they receive — even if the fund went on to
perform poorly after they bought shares.
Lack of control: Investors typically cannot ascertain the exact make-up of a fund's
portfolio at any given time, nor can they directly influence which securities the fund manager
buys and sells or the timing of those trades.
Dilution:Because funds have small holdings in so many different companies, high returns
from a few investments often don't make much difference on the overall return. Dilution is
also the result of a successful fund getting too big. When money pours into funds that have
had strong success, the manager often has trouble finding a good investment for all the new
money.
Price Uncertainty:With an individual stock, one can obtain real-time (or close to real-
time) pricing information with relative ease by checking financial websites or through a
broker, as can one observe stock price changes by the hour or minute. By contrast, with a
mutual fund, the price at which one purchases or redeems shares will typically depend on the
fund's NAV, which the fund might not calculate until many hours after the order has been
placed. In general, mutual funds must calculate their NAV at least once every business day,
typically after the major U.S. exchanges close.
Taxes:Fund managers don't consider personal tax situation while making decisions
regarding the fund. For example, when a fund manager sells a security, a capital-gains tax is
triggered, which affects the profitability of an individual investor from the sale. It might have
been more advantageous for the individual to defer the capital gains liability
30
Structure of Mutual Funds
A mutual fund is usually either a corporation or a business trust (which is like a corporation).
Like any corporation, a mutual fund is owned by its shareholders. Virtually all mutual funds
are externally managed; they do not have employees of their own. Instead, their operations
are conducted by affiliated organizations and independent contractors.
Other Types of Investment Companies
Mutual funds are one of four types of investment companies; the other three are open-end
fund, closed-end funds and unit investment trusts.
31
HISTORY OF INDIAN MUTUAL FUND INDUSTRY
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. Though the growth was slow,
but it accelerated from the year 1987 when non-UTI players entered the Industry. In the past
decade, Indian mutual fund industry had seen a dramatic improvement, both qualities wise as
well as quantity wise. Before, the monopoly of the market had seen anending phase; the
Assets Under Management (AUM) was Rs67 billion. The private sector entry to the fund
family raised the Aum to Rs. 470 billion in March 1993 and till April 2004; it reached the
height if Rs. 1540 billion.
The Mutual Fund Industry is obviously growing at a tremendous space with the mutual fund
industry can be broadly put into four phases according to the development of the sector. Each
phase is briefly described as under.
First Phase – 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament 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.6,700crores of assets under management.
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 (Jun90), Bank of Baroda Mutual Fund
(Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund
32
in December 1990.At the end of 1993, the mutual fund industry had assets under
management of Rs.47,004crores.
Third Phase – 1993-2003 (Entry of Private Sector Funds)
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. As at the end of January 2003,
there were 33 mutual funds with total assets of Rs. 1,21,805crores.
Fourth Phase – since 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.29,835crores as at the end of January 2003,
representing broadly, the assets of US 64 scheme, assured return and certain other schemes
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.Consolidation and
growth. As at the end of September, 2004, there were 29 funds, which manage assets of
Rs.153108crores under 421 schemes.
33
CURRENT SCENARIO:
The fund industry has grown phenomenally over the past couple of years, and as on 31
January 2008, it had a debt and equity assets of Rs 5,50,157 crore. Its equity corpus of Rs
2,20,263 lakh crore accounts for over 3 per cent of the total market capitalization of BSE, at
Rs 58 lakh crore. Its holding in Indian companies ranges between 1 per cent and almost 29
per cent, making them an influential shareholder. Together with banks, insurance
companies and FIIs- collectively called institutional investors- they have the ability to ask
company managements some tough questions.
More significant than this stupendous growth has been the regulatory changes that the capital market
watchdog, Securities and Exchange Board of India, introduced in the past two years. Outgoing Sebi Chairman
M.Damodaran’s two year stint as chairman of Unit Trust of India helped him reform the industry by making it
much more transparent than before. In the process, mutual funds have become a tad cheaper.
Until 2007, for instance, initial issue expenses on close-ended funds, which could be as high as 6 per cent of
the amount raised, could be amortized over the tenure of the fund. This basically meant that even if an
investor put in Rs 1 lakh, effectively only Rs 94,000 got invested by the fund. The initial expenses of the fund
include commissions paid to distributors and money spent on billboards for advertising the new offer. In 2006,
the regulator had scrapped the amortization benefit for open-ended schemes. Not surprisingly, asset
management companies started launching closed-ended funds. Of the 34 new fund offers in 2007, 24 were
closed-ended. In January this year, SEBI said all closed-ended mutual fund schemes too will meet sales and
marketing expenses from the entry load. This made it more transport for investors, because funds had to
either hike their expense ratio (management fee and operating charges as a percentage of assets under
management) or change higher entry load.
34
More About Mutual funds
According to SEBI "Mutual Fund" means a fund established in the form of a trust to raise
monies through the sale of units to the public or a section of the public under one or more
schemes for investing in securities, including money market instruments;"
To the ordinary individual investor lacking expertise and specialized skill in dealing
proficiently with the securities market a Mutual Fund is the most suitable investment forum
as it offers an opportunity to invest in a diversified, professionally managed basket of
securities at a relatively low cost. India has a burgeoning population of middle class now
estimated around 300 million. A typical Indian middle class family can pool liquid savings
ranging from Rs.2 to Rs.10 Lacs. Investment of this money in Banks keeps the fund liquid
and safe, but with the falling rate of interest offered by Banks on Deposits, it is no longer
attractive. At best a small part can be parked in bank deposits, but what are the other
sources of remunerative investment possibilities open to the common man? Mutual Fund is
the ready answer, as direct PMS investment is out of the scope of these individuals. Viewed
in this sense India is globally one of the best markets for Mutual Fund Business, so also for
Insurance business. This is the reason that foreign companies compete with one another in
setting up insurance and mutual fund business shops in India. The sheer magnitude of the
population of educated white-collar employees with raising incomes and a well-organized
stock market at par with global standards, provide unlimited scope for development of
financial services based on PMS like mutual fund and insurance.
The alternative to mutual fund is direct investment by the investor in equities and bonds or
corporate deposits. All investments whether in shares, debentures or deposits involve risk:
share value may go down depending upon the performance of the company, the industry,
state of capital markets and the economy. Generally, however, longer the term, lesser is the
risk. Companies may default in payment of interest/ principal on their
debentures/bonds/deposits; the rate of interest on an investment may fall short of the rate
of inflation reducing the purchasing power. While risk cannot be eliminated, skillful
management can minimise risk. Mutual Funds help to reduce risk through diversification
and professional management. The experience and expertise of Mutual Fund managers in
selecting fundamentally sound securities and timing their purchases and sales help them to
build a diversified portfolio that minimises risk and maximises returns.
35
Chapter III
Company Profile
36
INTRODUCTION TO SBI MUTUAL FUND
SBI Funds Management Pvt. Ltd. is one of the leading fund houses in
the country with an investor base of over 4.6 million and over 20 years
of rich experience in fund management consistently delivering value to
its investors. SBI Funds Management Pvt. Ltd. is a joint venture between
'The State Bank of India' one of India's largest banking enterprises, and
Société Générale Asset Management (France), one of the world's leading
fund management companies that manages over US$ 500 Billion
worldwide.
Today the fund house manages over Rs 28500 crores of assets and has a
diverse profile of investors actively parking their investments across 36
active schemes. In 20 years of operation, the fund has launched 38
schemes and successfully redeemed 15 of them, and in the process, has
rewarded our investors with consistent returns. Schemes of the Mutual
Fund have time after time outperformed benchmark indices, honored us
with 15 awards of performance and have emerged as the preferred
investment for millions of investors. The trust reposed on us by over 4.6
million investors is a genuine tribute to our expertise in fund
management.
SBI Funds Management Pvt. Ltd. serves its vast family of investors
through a network of over 130 points of acceptance, 28 Investor Service
Centres, 46 Investor Service Desks and 56 District Organizers.SBI
37
Mutual is the first bank-sponsored fund to launch an offshore fund – Resurgent
India Opportunities Fund.
Growth through innovation and stable investment policies is the SBI MF credo.
PRODUCTS OF SBI MUTUAL FUND
Equity schemes
The investments of these schemes will predominantly be in the stock
markets and endeavor will be to provide investors the opportunity to
benefit from the higher returns which stock markets can provide.
However they are also exposed to the volatility and attendant risks of
stock markets and hence should be chosen only by such investors who
have high risk taking capacities and are willing to think long term.
Equity Funds include diversified Equity Funds, Sectoral Funds and
Index Funds. Diversified Equity Funds invest in various stocks across
different sectors while sectoral funds which are specialized Equity
Funds restrict their investments only to shares of a particular sector and
hence, are riskier than Diversified Equity Funds. Index Funds invest
passively only in the stocks of a particular index and the performance of
such funds move with the movements of the index.
Magnum COMMA Fund
Magnum Equity Fund
Magnum Global Fund
Magnum Index Fund
38
Magnum Midcap Fund
Magnum Multicap Fund
Magnum Multiplier plus 1993
Magnum Sectoral Funds Umbrella
MSFU- Emerging Business Fund
MSFU- IT Fund
MSFU- Pharma Fund
MSFU- Contra Fund
MSFU- FMCG Fund
SBI Arbitrage Opportunities Fund
SBI Blue chip Fund
SBI Infrastructure Fund - Series I
SBI Magnum Taxgain Scheme 1993
SBI ONE India Fund
SBI TAX ADVANTAGE FUND - SERIES I
Debt schemes
Debt Funds invest only in debt instruments such as Corporate Bonds,
Government Securities and Money Market instruments either
completely avoiding any investments in the stock markets as in Income
Funds or Gilt Funds or having a small exposure to equities as in
Monthly Income Plans or Children's Plan. Hence they are safer than
equity funds. At the same time the expected returns from debt funds
39
would be lower. Such investments are advisable for the risk-averse
investor and as a part of the investment portfolio for other investors.
Magnum Children’s benefit Plan
Magnum Gilt Fund
Magnum Income Fund
Magnum Insta Cash Fund
Magnum Income Fund- Floating Rate Plan
Magnum Income Plus Fund
Magnum Insta Cash Fund -Liquid Floater Plan
Magnum Monthly Income Plan
Magnum Monthly Income Plan - Floater
Magnum NRI Investment Fund
SBI Premier Liquid Fund
BALANCED SCHEMES
Magnum Balanced Fund invests in a mix of equity and debt
investments. Hence they are less risky than equity funds, but at the same
time provide commensurately lower returns. They provide a good
investment opportunity to investors who do not wish to be completely
exposed to equity markets, but is looking for higher returns than those
provided by debt funds.
Magnum Balanced Fund
40
COMPETITORS OF SBI MUTUAL FUND
Some of the main competitors of SBI Mutual Fund in Dehradoon are as
Follows:
i. ICICI Mutual Fund
ii. Reliance Mutual Fund
iii. UTI Mutual Fund
iv. Birla Sun Life Mutual Fund
v. Kotak Mutual Fund
vi. HDFC Mutual Fund
vii. Sundaram Mutual Fund
viii. LIC Mutual Fund
ix. Principal
x. Franklin Templeton
41
AWARDS AND ACHIEVEMENTS
SBI Mutual Fund (SBIMF) has been the proud recipient of the ICRA Online
Award - 8 times, CNBC TV - 18 Crisil Award 2006 - 4 Awards, The Lipper
Award (Year 2005-2006) and most recently with the CNBC TV - 18 Crisil
Mutual Fund of the Year Award 2007 and 5 Awards for our schemes.
42
43
Chapter IV
Research Methodology
44
RESEARCH METHODOLOGY
The nature of the study is descriptive research. This report is based on secondary information
that are collected from published as well as un-published sources. One of the most important
users of research methodology is that it helps in identifying the problem, collecting,
analyzing the required information data and providing an alternative solution to the
problem .It also helps in collecting the vital information that is required by the top
management to assist them for the better decision making both day to day decision and
critical ones.
DATA SOURCES
The secondary data has been collected through various journals and websites. Various journals and magazines were referred during this course of study.
www.ebay.com
www.google.com
www.yahoo.co.in
Magazines-
India today
Outlook
Business today
Newspaper-
Times of india
Hindustan times
The hindu
Economic times
45
Chapter V
RECENT TRENDS IN
THE MUTUAL FUNDS
46
RECENT TRENDS IN THE MUTUAL FUND INDUSTRY
The most important trend in the mutual fund industry is the aggressive expansion of the
foreign owned mutual fund companies and the decline of the companies floated by the
nationalized banks and smaller private sector players.
Many nationalized banks got into the mutual fund business in the early nineties and got off
to a start due to the stock market boom was prevailing. These banks did not really
understand the mutual fund business and they just viewed it as another kind of banking
activity. Few hired specialized staff and generally chose to transfer staff from the parent
organizations. The performance of most of the schemes floated by these funds was not
good. Some schemes had offered guaranteed returns and their parent organizations had to
bail out these AMCs by paying large amounts of money as a difference between the
guaranteed and actual returns. The service levels were also very bad. Most of these AMCs
have not been able to retain staff, float new schemes etc.
REGULATORY BODIES
SECURITIES EXCHANGE BOARD OF INDIA
Mutual Funds in India are comprehensively regulated under the SEBI (Mutual Funds)
Regulation, 1996; some of the important provisions are as follows:
A Mutual Fund shall be constituted in the form of a trust executed by the sponsor in
favour of the trustees.
The sponsor or, if so authorized by the trust deed, the trustees, shall appoint an asset
management company.
The Mutual Fund shall appoint a custodian.
No scheme shall be launched by the AMC unless it is approved by the trustees and the
copy of the offer document has been filed with SEBI.
The offer document and the advertisement materials shall not be misleading.
No guaranteed return shall be provided in the scheme unless such returns are fully
guaranteed by the sponsor or AMC.
47
The moneys collected under any scheme of Mutual Fund shall be invested only on
transferable certificates.
The money collected under any money market scheme of Mutual Fund shall be
invested only in money market instruments in accordance with the direction issued by
the Reserve Bank of India.
The Mutual Funds cannot be borrowed except to meet temporary liquidity needs.
The NAV and the sale and the repurchase price of Mutual Funds scheme must be
regularly published in daily newspapers.
Every AMC shall keep and maintain proper books of accounts records, documents for
each scheme.
ASSOCIATION OF MUTUAL FUNDS OF INDIA
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 organization. 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 members. It functions under the supervision and guidelines of board of directors. AMFI
has brought down the Indian Mutual Fund Industry to a professional and healthy market with
ethical lines enhancing and maintaining standards. It follows the principle of both protecting
and promoting the interest of mutual funds as well as their unit holders.
It has been a forum where mutual funds have been able to present their views, debate and
participate in creating their own regulatory framework. The association was created originally
as a body that would lobby with the regulator to ensure that the fund viewpoint was heard.
Today, it is usually the body that is consulted on matters long before regulations are framed,
and it often initiates many regulatorychanges that prevent malpractices that emerge from time
to time.
AMFI works through a number of committees, some of which are standing committees to
address areas where there is a need for constant vigil and improvements and other which are
adhoc committees constituted to address specific issues. These committees consist of industry
professionals from among the member mutual funds. There is now some thought that AMFI
48
should become a self-regulatory organization since it has worked so effectively as an industry
body.
The main objectives of AMFI are as follows:
To define and maintain high professional and ethical standards in all areas of operation
of the mutual fund industry.
To recommend and promote best business practices and code of conduct to be
followed by members and others engaged in the activities of mutual fund and
assetmanagement including agencies connected or involved in the field of capital
markets.
To interact with the Securities and Exchange Board of India (SEBI) and to represent
to SEBI on all matters concerning the mutual fund industry.
To represent to the Government, Reserve Bank of India and other bodies on all
matters relating to the Mutual Fund Industry.
To develop a cadre of well trained Agent distributors and to implement a programme
of training and certification for all intermediaries and other engaged in the industry.
To undertake nationwide investor awareness programme so as to promote proper
understanding of the concept and working of mutual funds.
To disseminate information on Mutual Fund Industry and to undertake studies and
research directly and/or in association with other bodies.
49
PERFORMANCE MEASURES OF MUTUAL FUNDS
Mutual Fund industry today, with about 34 players and more than five 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-à-vis market. The more
responsive the NAV of a mutual fund is to the changes in the market; higher will be its
beta. Beta is calculated by relating the returns on a mutual fund with the returns in
the market. While unsystematic risk can be diversified through investments in a
number of instruments, systematic risk can not. By using the risk return relationship,
50
we try to assess the competitive strength of the mutual funds vis-à-vis one another in
a better way.
In order to determine the risk-adjusted returns of investment portfolios, several
eminent authors have worked since 1960s to develop composite performance indices
to evaluate a portfolio by comparing alternative portfolios within a particular risk
class. The most important and widely used measures of performance are:
Ø The Treynor Measure
Ø The Sharpe Measure
Ø Jenson Model
ØFama Model
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The Treynor Measure
Developed by Jack Treynor, this performance measure evaluates funds on the basis of
Treynor's Index. This Index is a ratio of return generated by the fund over and above
risk free rate of return (generally taken to be the return on securities backed by the
government, as there is no credit risk associated), during a given period and
systematic risk associated with it (beta). Symbolically, it can be represented as:
Treynor's Index (Ti) = (Ri - Rf)/Bi.
Where, Ri represents return on fund, Rfis risk free rate of return and Biis beta of the
fund.
All risk-averse investors would like to maximize this value. While a high and positive
Treynor's Index shows a superior risk-adjusted performance of a fund, a low and
negative Treynor's Index is an indication of unfavorable performance.
The Sharpe Measure
In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which
is a ratio of returns generated by the fund over and above risk free rate of return and
the total risk associated with it. According to Sharpe, it is the total risk of the fund
that the investors are concerned about. So, the model evaluates funds on the basis of
reward per unit of total risk. Symbolically, it can be written as:
Sharpe Index (Si) = (Ri - Rf)/Si
Where, Si is standard deviation of the fund.
While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of
a fund, a low and negative Sharpe Ratio is an indication of unfavorable performance.
Comparison of Sharpe and Treynor
Sharpe and Treynor measures are similar in a way, since they both divide the risk
premium by a numerical risk measure. The total risk is appropriate when we are
evaluating the risk return relationship for well-diversified portfolios. On the other
hand, the systematic risk is the relevant measure of risk when we are evaluating less
than fully diversified portfolios or individual stocks. For a well-diversified portfolio
the total risk is equal to systematic risk. Rankings based on total risk (Sharpe
measure) and systematic risk (Treynor measure) should be identical for a well-
52
diversified portfolio, as the total risk is reduced to systematic risk. Therefore, a
poorly diversified fund that ranks higher on Treynor measure, compared with
another fund that is highly diversified, will rank lower on Sharpe Measure.
Jenson Model
Jenson's model proposes another risk adjusted performance measure. This measure
was developed by Michael Jenson and is sometimes referred to as the Differential
Return Method. This measure involves evaluation of the returns that the fund has
generated vs. the returns actually expected out of the 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, Rm is average market return during the given period. After calculating it,
alpha can be obtained by subtracting required return from the actual return of the
fund.
Higher alpha represents superior performance of the fund and vice versa. Limitation
of this model is that it considers only systematic risk not the entire risk associated
with the fund and an ordinary investor cannot mitigate unsystematic risk, as his
knowledge of market is primitive.
Fama Model
The Eugene Fama model is an extension of Jenson model. This model compares the
performance, measured in terms of returns, of a fund with the required return
commensurate with the total risk associated with it. The difference between these
two is taken as a measure of the performance of the fund and is called net selectivity.
The net selectivity represents the stock selection skill of the fund manager, as it is the
excess return over and above the return required to compensate for the total risk
taken by the fund manager. Higher value of which indicates that fund manager has
earned returns well above the return commensurate with the level of risk taken by
him.
Required return can be calculated as: Ri = Rf + Si/Sm*(Rm - Rf)
53
Where, Sm is standard deviation of market returns. The net selectivity is then
calculated by subtracting this required return from the actual return of the fund.
Among the above performance measures, two models namely, Treynor measure and
Jenson model use systematic risk based on the premise that the unsystematic risk is
diversifiable. These models are suitable for large investors like institutional investors
with high risk taking capacities as they do not face paucity of funds and can invest in a
number of options to dilute some risks. For them, a portfolio can be spread across a
number of stocks and sectors. However, Sharpe measure and Fama model that
consider the entire risk associated with fund are suitable for small investors, as the
ordinary investor lacks the necessary skill and resources to diversified. Moreover, the
selection of the fund on the basis of superior stock selection ability of the fund
manager will also help in safeguarding the money invested to a great extent. The
investment in funds that have generated big returns at higher levels of risks leaves
the money all the more prone to risks of all kinds that may exceed the individual
investors' risk appetite.
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RISK FACTOR
All investments involve some form of risk. Even an insured bank account is subject to
the possibility that inflation will rise faster than your earnings, leaving you with less
real purchasing power than when you started (Rs. 1000 gets you less than it got your
father when he was your age).
The discussion on investment objectives would not be complete without a discussion
on the risks that investing in a mutual fund entails.
At the cornerstone of investing is the basic principle that the greater the risk you
take, the greater the potential reward. Remember that the value of all financial
investments will fluctuate. Typically, risk is defined as short-term price variability. But
on a long-term basis, risk is the possibility that your accumulated real capital will be
insufficient to meet your financial goals. And if you want to reach your financial goals,
you must start with an honest appraisal of your own personal comfort zone with
regard to risk. Individual tolerance for risk varies, creating a distinct "investment
personality" for each investor. Some investors can accept short-term volatility with
ease, others with near panic. So whether you consider your investment temperament
to be conservative, moderate or aggressive, you need to focus on how comfortable or
uncomfortable you will be as the value of your investment moves up or down.
Managing risks
Mutual funds offer incredible flexibility in managing investment risk. Diversification
and Systematic Investing Plan (SIP) are two key techniques you can use to reduce
your investment risk considerably and reach your long-term financial goals.
Diversification
When you invest in one mutual fund, you instantly spread your risk over a number of
different companies. You can also diversify over several different kinds of securities
by investing in different mutual funds, further reducing your potential risk.
Diversification is a basic risk management tool that you will want to use throughout
your lifetime as you rebalance your portfolio to meet your changing needs and goals.
Investors, who are willing to maintain a mix of equity shares, bonds and money
market securities have a greater chance of earning significantly higher returns over
55
time than those who invest in only the most conservative investments. Additionally, a
diversified approach to investing -- combining the growth potential of equities with
the higher income of bonds and the stability of money markets -- helps moderate
your risk and enhance your potential return.
56
Types of risks:
Consider these common types of risk and evaluate them against potential rewards
when you select an investment.
Market Risk
At times the prices or yields of all the securities in a particular market rise or fall due
to broad outside influences. When this happens, the stock prices of both, an
outstanding, highly profitable company and a fledgling corporation may be affected.
This change in price is due to "market risk.”
Inflation Risk
Sometimes referred to as "loss of purchasing power." Whenever inflation sprints
forward faster than the earnings on your investment, you run the risk that you'll
actually be able to buy less, not more. Inflation risk also occurs when prices rise faster
than your returns.
Credit Risk
In short, how stable is the company or entity to which you lend your money when
you invest? How certain are you that it will be able to pay the interest you are
promised, or repay your principal when the investment matures?
Interest Rate Risk
Changing interest rates affect both equities and bonds in many ways. Investors are
reminded that "predicting" which way rates will go is rarely successful. A diversified
portfolio can help in offsetting these changes.
Effect of loss of key professionals and inability to adapt business to the rapid
technological change
An industries' key asset is often the personnel who run the business i.e. intellectual
properties of the key employees of the respective companies. Given the ever-
changing complexion of few industries and the high obsolescence levels, availability
of qualified, trained and motivated personnel is very critical for the success of
industries in few sectors. It is, therefore, necessary to attract key personnel and also
57
to retain them to meet the changing environment and challenges the sector offers.
Failure or inability to attract/retain such qualified key personnel may impact the
prospects of the companies in the particular sector in which the fund invests.
Exchange Risks
A number of companies generate revenues in foreign currencies and may have
investments or expenses also denominated in foreign currencies. Changes in
exchange rates may, therefore, have a positive or negative impact on companies
which in turn would have an effect on the investment of the fund.
I nvestment Risks
The sectoral fund schemes, investments will be predominantly in equities of select
companies in the particular sectors. Accordingly, the NAV of the schemes are linked
to the equity performance of such companies and may be more volatile than a more
diversified portfolio of equities.
Changes in the Government Policy
Changes in Government policy especially in regard to the tax benefits may impact the
business prospects of the companies leading to an impact on the investments made
by the fund.
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Financial planning for investors( ref. to mutual funds):
Investors are required to go for financial planning before making investments in any mutual
fund. The objective of financial planning is to ensure that the right amount of money is
available at the right time to the investor to be able to meet his financial goals. It is more than
mere tax planning. Steps in financial planning are:
Asset allocation.
Selection of fund.
Studying the features of a scheme.
In case of mutual funds, financial planning is concerned only with broad asset allocation,
leaving the actual allocation of securities and their management to fund managers. A fund
manager has to closely follow the objectives stated in the offer document, because financial
plans of users are chosen using these objectives.
Why has it become one of the largest financial instruments?
If we take a look at the recent scenario in the Indian financial market then we can find the
market flooded with a variety of investment options which includes mutual funds, equities,
fixed income bonds, corporate debentures, company fixed deposits, bank deposits, PPF, life
insurance, gold, real estate etc. all these investment options could be judged on the basis of
various parameters such as- return, safety convenience, volatility and liquidity. measuring
these investment options on the basis of the mentioned parameters, we get this in a tabular
form
Return Safety Volatility Liquidity Convenienc
e
Equity High Low High High Moderate
Bonds Moderate High Moderate Moderate High
59
Co.
Debentures
Moderate Moderate Moderate Low Low
Co. FDs Moderate Low Low Low Moderate
Bank
Deposits
Low High Low High High
PPF Moderate High Low Moderate High
Life
Insurance
Low High Low Low Moderate
Gold Moderate High Moderate Moderate Gold
Real Estate High Moderate High Low Low
Mutual
Funds
High High Moderate High High
We can very well see that mutual funds outperform every other investment option. On three
parameters it scores high whereas it’s moderate at one. comparing it with the other options,
we find that equities gives us high returns with high liquidity but its volatility too is high with
low safety which doesn’t makes it favourite among persons who have low risk- appetite.
Even the convenience involved with investing in equities is just moderate.
Now looking at bank deposits, it scores better than equities at all
fronts but lags badly in the parameter of utmost important ie; it scores low on return , so it’s
not an happening option for person who can afford to take risks for higher return. The other
option offering high return is real estate but that even comes with high volatility and
60
moderate safety level, even the liquidity and convenience involved are too low. Gold have
always been a favourite among Indians but when we look at it as an investment option then it
definitely doesn’t gives a very bright picture. Although it ensures high safety but the returns
generated and liquidity are moderate. Similarly the other investment options are not at par
with mutual funds and serve the needs of only a specific customer group. Straightforward,
we can say that mutual fund emerges as a clear winner among all the options available.
The reasons for this being:
I)Mutual funds combine the advantage of each of the investment products: mutual fund
is one such option which can invest in all other investment options. Its principle of
diversification allows the investors to taste all the fruits in one plate. just by investing in it,
the investor can enjoy the best investment option as per the investment objective.
II)dispense the shortcomings of the other options: every other investment option has more
or les some shortcomings. Such as if some are good at return then they are not safe, if some
are safe then either they have low liquidity or low safety or both….likewise, there exists no
single option which can fit to the need of everybody. But mutual funds have definitely sorted
out this problem. Now everybody can choose their fund according to their investment
objectives.
III) Returns get adjusted for the market movements: as the mutual funds are managed by
experts so they are ready to switch to the profitable option along with the market movement.
Suppose they predict that market is going to fall then they can sell some of their shares and
book profit and can reinvest the amount again in money market instruments.
IV) Flexibility of invested amount: Other then the above mentioned reasons, there exists
one more reason which has established mutual funds as one of the largest financial
intermediary and that is the flexibility that mutual funds offer regarding the investment
amount. One can start investing in mutual funds with amount as low as Rs. 500 through SIPs
and even Rs. 100 in some cases.
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How do investors choose between funds?
When the market is flooded with mutual funds, it’s a very tough job for the investors to
choose the best fund for them. Whenever an investor thinks of investing in mutual funds, he
must look at the investment objective of the fund. Then the investors sort out the funds whose
investment objective matches with that of the investor’s. Now the tough task for investors
start, they may carry on the further process themselves or can go for advisors like SBI . Of
course the investors can save their money by going the direct route i.e. through the AMCs
directly but it will only save 1-2.25% (entry load) but could cost the investors in terms of
returns if the investor is not an expert. So it is always advisable to go for MF advisors. The
mf advisors’ thoughts go beyond just investment objectives and rate of return. Some of the
basic tools which an investor may ignore but an mf advisor will always look for are as
follow:
1. Rupee cost averaging:
The investors going for Systematic Investment Plans(SIP) and Systematic Transfer
Plans(STP) may enjoy the benefits of RCA (Rupee Cost Averaging). Rupee cost averaging
allows an investor to bring down the average cost of buying a scheme by making a fixed
investment periodically, like Rs 5,000 a month and nowadays even as low as Rs. 500 or Rs.
100. In this case, the investor is always at a profit, even if the market falls. In case if the NAV
of fund falls, the investors can get more number of units and vice-versa. This results in the
average cost per unit for the investor being lower than the average price per unit over time.
The investor needs to decide on the investment amount and the frequency. More frequent the
investment interval, greater the chances of benefiting from lower prices. Investors can also
benefit by increasing the SIP amount during market downturns, which will result in reducing
the average cost and enhancing returns. Whereas STP allows investors who have lump sums
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to park the funds in a low-risk fund like liquid funds and make periodic transfers to another
fund to take advantage of rupee cost averaging.
2. Rebalancing:
Rebalancing involves booking profit in the fund class that has gone up and investing in the
asset class that is down. Trigger and switching are tools that can be used to rebalance a
portfolio. Trigger facilities allow automatic redemption or switch if a specified event occurs.
The trigger could be the value of the investment, the net asset value of the scheme, level of
capital appreciation, level of the market indices or even a date. The funds redeemed can be
switched to other specified schemes within the same fund house. Some fund houses allow
such switches without charging an entry load.
To use the trigger and switch facility, the investor needs to specify the event, the amount or
the number of units to be redeemed and the scheme into which the switch has to be made.
This ensures that the investor books some profits and maintains the asset allocation in the
portfolio.
3. Diversification:
Diversification involves investing the amount into different options. In case of mutual funds,
the investor may enjoy it afterwards also through dividend transfer option. Under this, the
dividend is reinvested not into the same scheme but into another scheme of the investor's
choice.
For example, the dividends from debt funds may be transferred to equity schemes. This gives
the investor a small exposure to a new asset class without risk to the principal amount. Such
transfers may be done with or without entry loads, depending on the MF's policy.
4. Tax efficiency:
Tax factor acts as the “x-factor” for mutual funds. Tax efficiency affects the final decision of
any investor before investing. The investors gain through either dividends or capital
appreciation but if they haven’t considered the tax factor then they may end loosing.
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Debt funds have to pay a dividend distribution tax of 12.50 per cent (plus surcharge and
education cess) on dividends paid out. Investors who need a regular stream of income have to
choose between the dividend option and a systematic withdrawal plan that allows them to
redeem units periodically. SWP implies capital gains for the investor.
If it is short-term, then the SWP is suitable only for investors in the 10-per-cent-tax bracket.
Investors in higher tax brackets will end up paying a higher rate as short-term capital gains
and should choose the dividend option.
If the capital gain is long-term (where the investment has been held for more than one year),
the growth option is more tax efficient for all investors. This is because investors can redeem
units using the SWP where they will have to pay 10 per cent as long-term capital gains tax
against the 12.50 per cent DDT paid by the MF on dividends.
All the tools discussed over here are used by all the advisors and have helped investors in
reducing risk, simplicity and affordability. Even then an investor needs to examine costs, tax
implications and minimum applicable investment amounts before committing to a service.
Most popular stocks among fund managers (as on 30th April 2008)
Company Name no. of funds Reliance industries limited 244Larsen & toubro limited 206ICICI bank limited 202State bank of India 188Bharti airtel limited 184Bharat heavy electricals limited 200Reliance communication ventures ltd 169Infosys technologies ltd 159Oil& Natural gas corporation ltd. 153ITC ltd. 143
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We can easily point out that reliance industries limited emerges as a true winner over here
attracting the attention of almost244 managers well followed by Larsen & toubro ltd ICICI
bank ltd and Bharat heavy electricals ltd. The other companies succeeding in getting a place
at top 10 are SBI, Bharti airtel limited, reliance communications, Infosys technologies
limited, ONGC and at last ITC ltd.
What are the most lucrative sectors for mutual fund managers?
This is a question of utmost interest for all the investors even for those who don’t invest in
mutual funds. Because the investments done by the MFs acts as trendsetters. The investments
made by the fund managers are used for prediction. Huge investments assure liquidity and
reflects appositive picture whereas tight investment policy reflects crunch and investors may
look forward for a gloomy picture.
Their investments show that which sector is hot? And will set the market trends. The expert
management of the funds will always look for profitable and high paying sectors. So we can
have a look at most lucrative sectors to know about the recent trends:
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Sector name No. of MFs betting on itautomotive 255banking & financial services
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cement & construction 237consumer durables 51conglomerates 218chemicals 259consumer non durables 146engineering & capital goods
317
food & beverages 175information technology 284media & entertainment 218Manufacturing 259metals& mining 275Miscellaneous 250oil & gas 290Pharmaceuticals 250Services 200Telecom 264Tobacco 150Utility 225
From the above data collected we can say that engineering & capital goods sector has
emerged as the hottest as most of the funds are betting on it. We can say that this sector is on
boom and presents a bright picture. Other than it other sectors on height are oil & gas,
telecom, metals & mining and information technology. Sectors performing average are
automotive, cement & construction, chemicals, media & entertainment, manufacturing,
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miscellaneous, pharmaceuticals and utility. The sectors which are not so favourite are
banking & financial services, conglomerates, consumer non- durables, food & beverages,
services and tobacco. And the sector which failed to attract the fund managers is consumer
durables with just 51 funds betting on it.
Thus this analysis not only gives a picture of the mindset of fund managers rather it also
reflects the liquidity existing in each of the sectors. It is not only useful for investors of
mutual funds rather the investors of equity and debt too could take a hint from it. Asset
allocation by fund managers are based on several researches carried on so, it is always
advisable for other investors too take a look on it. It can be further presented in the form of a
graph as follow:
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Systematic investment plan (in details)
We have already mentioned about SIPs in brief in the previous pages but now going into
details, we will see how the power of compounding could benefit us. In such case, every
small amounts invested regularly can grow substantially. SIP gives a clear picture of how an
early and regular investment can help the investor in wealth creation. Due to its unlimited
advantages SIP could be redefined as “a methodology of fund investing regularly to benefit
regularly from the stock market volatility. In the later sections we will see how returns
generated from some of the SIPs have outperformed their benchmark. But before moving on
to that lets have a look at some of the top performing SIPs and their return for 1 year:
Scheme Amount NAV NAV Date Total Amount
Reliance diversified power sector retail 1000 62.74 30/5/2008 14524.07Reliance regular savings equity 1000 22.208 30/5/2008 13584.944principal global opportunities fund 1000 18.86 30/5/2008 14247.728DWS investment opportunities
fund 1000 35.31 30/5/2008 13791.157
BOB growth fund 1000 42.14 30/5/2008 13769.152
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In the above chart, we can see how if we start investing Rs.1000 per month then what return
we’ll get for the total investment of Rs. 12000. There is reliance diversified power sector
retail giving the maximum returns of Rs. 2524.07 per year which comes to 21% roughly.
Next we can see if anybody would have undertaken the SIP in Principal would have got
returns of app. 18%. We can see reliance regular savings equity, DWS investment
opportunities and BOB growth fund giving returns of 13.20%, 14.92%, and 14.74%
respectively which is greater than any other monthly investment options. Thus we can easily
make out how SIP is beneficial for us. Its hassle free, it forces the investors to save and get
them into the habit of saving. Also paying a small amount of Rs. 1000 is easy and convenient
for them, thus putting no pressure on their pockets.
Now we will analyze some of the equity fund SIP s of Birla Sunlife with BSE 200 and bank
fixed deposits In a tabular format as well as graphical.
Scheme Name
NO. OF
INSTALMENTS Original inv Returns at BSE 200 FUND RETURNS
Birla SL tax relief '96 144 144000 553190 1684008
Birla SL equity fund 114 114000 388701 669219Birla frontline equity fund 66 66000 156269 181127
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In the above case, we have taken three funds of Birla sunlife namely Birla sunlife tax relief
’96, Birla sunlife equity fund and Birla sunlife frontline equity fund. All these three funds
follow the same benchmark ie; BSE 200. Here, we have shown how one would have
benefitted if he would have put his money into these schemes since their inception. And the
amount even is a meager Rs. 1000 per month.
Starting from Birla frontline equity fund, we could spot that if someone would have invested
Rs. 1000 per month resulting into total investment of Rs. 66000 then it would have amounted
to rs.156269 if invested in BSE 200 whereas the fund would have given a total return of Rs
181127. Now moving next to Birla sunlife equity fund, a total investment of 114000 for a
total of 114 months at BSE 200 would have given a total return of Rs. 388701 whereas the
fund gave a total return of Rs. 669219, nearly double the return generated at BSE 200. And
now the cream of all the investments, Birla sunlife tax relief ’96. A total investment of Rs.
144000 for a period of 12 years at BSE 200 would have given total returns of just Rs. 553190
but the Birla sunlife tax relief ’96 gave an unbelievable total return of Rs 1684008.
Thus the above case very well explains the power of compounding and early investment. We
have seen how a meager amount of Rs. 144000 turned into Rs. 1684008. It may appear
unbelievable for many but SIPs have turned this into reality and the power of compounding is
speaking loud, attracting more and more investors to create wealth through SIPs.
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Does fund performance and ranking persist?
This project has been a great learning experience for me. But the analyses that are carried
onward these pages are really close to my heart. After taking a look at the data presented
below, an expert might underestimate my efforts. One might think it as a boring task and can
go for recording historic NAVs since last 1 month instead of recording it daily.
But frankly speaking, while tracking the NAVs, I really developed some sentiments with
these funds. Really the ups and downs in the NAVs affected me as if I m tracking my own
portfolio. The portfolio consists of different types of funds. We can see some funds are 5- star
rated but their performances are below the unrated funds. We can also find some funds which
performed very well initially but gradually declined either in short- run or long run. Some
funds have high NAVS but the returns offered are low. We can also see some funds
following same benchmark and reflecting diverse NAV and returns. Even it can be seen that
the expense ratios for various funds varies which may affect the ultimate return.
Now before going into details, lets have a look at those funds: in this downgrading equity
market, we can easily make out that the 1 year return of the fund that was on 17 th of april
could not be sustained till 1 month. One can sort out that the present return of funds has
decreased a lot and subsequently its NAV too has come down. All the funds are showing
negative returns for the last 1 month. Even the two hybrid funds are showing negative
monthly returns. That means all those who bought these funds a month back must be
experiencing a negative return. Although the annual return of the funds have gone down in
comparison to what it was offering a month back. Still the total return is positive. On an
average the equity funds are offering a return of 30% annually, inspite of a week equity
market.
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Now checking the validity of funds’ ratings, we can see that some of the funds are 5 star or 4
star rated but their returns lag behind the unrated funds. Although, since the ratings include
both risk and return so it will not be a total justice to judge the funds purely on a return basis
but still we can go for it just to judge them on the basis of returns generated.
Looking at the funds, we have three 5 star rated funds, one 4star rated and six unrated funds.
In other way, we have seven equity diversified funds, one equity specialty, one hybrid:
dynamic asset allocation and one hybrid: debt oriented fund. It is not possible to compare
each and every fund in details. So I have compared 2 funds out of this list on the basis of their
returns and expenses.
Here DBS Chola opportunities and ICICI Pru infrastructure follows the same benchmark
S&P CNX NIFTY. In this case, DBS Chola opportunities is a 4 star rated fund whereas ICICI
Pru infrastructure is an unrated fund. The star rating definitely gives DBS a competitive
advantage but now lets have a look at other factors, we can see that ICICI Pru has really
performed worse in the last month. Its 1 month return is -5.8% whereas DBS gave a return of
-3.07%. Even if we consider 6 months return or yearly returns, definitely DBS is a winner.
We can easily spot the difference by change in their rankings even. Considering 1 yr return,
we can spot DBS at no.5 whereas ICICI at no.6 but when we look at the monthly ratings, to
our ultimate shock, DBS is at 52 and ICICI far behind at 172. But if we look at the yearly
returns, then there is not much difference between them, DBS offering returns of 35.17%
whereas ICICI offering 34.27. But looking at the expenses, the expenses charged by ICICI is
lower to that of DBS, which may act as the ultimate factor in choosing the fund in a long run.
Thus at last we can conclude that ratings are totally irrelevant for investors. Here is
why they are totally irrelevant to investor:
1. Mutual fund ratings are based on the returns generated, that is, appreciation of net
asset value, based on the historical performance. So they rely more on the past, rather
than the current scenario.
2. As returns play a key role in deciding the ratings, any change in returns will lead to
re-rating of the mutual fund. If you choose your mutual fund only on the basis of
rating, it will be a nuisance to keep realigning your investment in line with the
revision of the ratings.
3. The ratings don’t value the investment processes followed by the mutual fund. As a
result, a fund following a certain process may lose out to a fund that has given
superior returns only because it has a star fund manager. But there is a higher risk
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associated with a star fund manager that the ratings don’t reflect. If the star fund
manager quits, it can throw the working of a mutual fund out of gear and thus affect
its performance.
4. The ratings don’t show the level of ethics followed by the fund. A fund or fund
manager that is involved in a scam or financial irregularities won’t get poor ratings on
the basis of ethics. As the star ratings look at just returns, any wrongdoing carried out
by the fund or fund manager will be completely ignored.
5. Ratings also don’t consider two very important factors: transparency and keeping
investors informed. There are no negative ratings awarded to the fund for being
investor-unfriendly.
6. Ratings don’t match the investor’s risk-appetite with their portfolio. As a matter of
fact, investments should be done only after considering the risk appetite of the
investor. For example, equities may not be the best investment vehicle for a very
conservative investor. However ratings fail to take that into account.
Ratings should be the starting point for making an investment decision. They are not the be
all and end all of mutual fund investments. There are other important factors like portfolio
management, age of funds and more, which should be taken into account before making an
investment.
Portfolio analysis tools:
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With the increasing number of mutual fund schemes, it becomes very difficult for an investor
to choose the type of funds for investment. By using some of the portfolio analysis tools, he
can become more equipped to make a well informed choice. There are many financial tools to
analyze mutual funds. Each has their unique strengths and limitations as well. Therefore, one
needs to use a combination of these tools to make a thorough analysis of the funds.
The present market has become very volatile and buoyant, so it is getting difficult for the
investors to take right investing decision. so the easiest available option for investors is to
choose the best performing funds in terms of “returns” which have yielded maximum returns.
But if we look deeply to it, we can find that the returns are important but it is also important
to look at the ‘quality’ of the returns. ‘Quality’ determines how much risk a fund is taking to
generate those returns. One can make a judgment on the quality of a fund from various ratios
such as standard deviation, sharpe ratio, beta, treynor measure, R-squared, alpha, portfolio
turnover ratio, total expense ratio etc.
Now I have compared two funds of SBI on the basis of standard deviation, beta, R-squared,
sharpe ratio, portfolio turnover ratio and total expense ratio. So before going into details, lets
have a look at these ratios:
Standard deviation:
in simple terms standard deviation is one of the commonly used statistical parameter to
measure risk, which determines the volatility of a fund. Deviation is defined as any variation
from a mean value (upward & downward). Since the markets are volatile, the returns
fluctuate everyday. High standard deviation of a fund implies high volatility and a low
standard deviation implies low volatility.
Beta analysis:
beta is used to measure the risk. It basically indicates the level of volatility associated with
the fund as compared to the market. In case of funds, as compared to the market. In case of
funds, beta would indicate the volatility against the benchmark index. It is used as a short
term decision making tool. A beta that is greater than 1 means that the fund is more volatile
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than the benchmark index, while a beta of less than 1 means that the fund is more volatile
than the benchmark index. A fund with a beta very close to 1 means the fund’s performance
closely matches the index or benchmark.
The success of beta is heavily dependent on the correlation between correlation between a
fund and its benchmark. Thus, if the fund’s portfolio doesn’t have a relevant benchmark
index then a beta would be grossly inappropriate. For example if we are considering a
banking fund, we should look at the beta against a bank index.
R-Squared (R2):
R squared is the square of ‘R’ (i.e.; coefficient of correlation). It describes the level of
association between the fun’s market volatility and market risk. The value of R- squared
ranges from0 to1. A high R- squared (more than 0.80) indicates that beta can be used as a
reliable measure to analyze the performance of a fund. Beta should be ignored when the r-
squared is low as it indicates that the fund performance is affected by factors other than the
markets.
For example:
Case 1 Case 2
R2 0.65 0.88
B 1.2 0.9
In the above tableR2 is less than 0.80 in case 1, implies that it would be wrong to mention
that the fund is aggressive on account of high beta. In case 2, the r- squared is more than 0.85
and beta value is 0.9. it means that this fund is less aggressive than the market.
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Sharpe ratio: sharpe ratio is a risk to reward ratio, which helps in comparing the returns given
by a fund with the risk that the fund has taken. A fund with a higher sharpe ratio means that
these returns have been generated taking lesser risk. In other words, the fund is less volatile
and yet generating good returns. Thus, given similar returns, the fund with a higher sharpe
ratio offers a better avenue for investing. The ratio is calculated as:
Sharpe ratio = (Average return- risk free rate) / standard deviation
Portfolio turnover ratio: Portfolio turnover is a measure of a fund's trading activity and is
calculated by dividing the lesser of purchases or sales (excluding securities with maturities of
less than one year) by the average monthly net assets of the fund. Turnover is simply a
measure of the percentage of portfolio value that has been transacted, not an indication of the
percentage of a fund's holdings that have been changed. Portfolio turnover is the purchase
and sale of securities in a fund's portfolio. A ratio of 100%, then, means the fund has bought
and sold all its positions within the last year. Turnover is important when investing in any
mutual fund, since the amount of turnover affects the fees and costs within the mutual fund.
Total expenses ratio: A measure of the total costs associated with managing and operating
an investment fund such as a mutual fund. These costs consist primarily of management fees
and additional expenses such as trading fees, legal fees, auditor fees and other operational
expenses. The total cost of the fund is divided by the fund's total assets to arrive at a
percentage amount, which represents the TER:
Total expense ratio = (Total fund Costs/ Total fund Assets)
Performance report and portfolio analysis of magnum equity fund and magnum
multiplier plus against their benchmark BSE100:
YTD 1M 3M 6M 1Y 3Y 5YMagnum equity fund
-23.73% 9.02% -7.71% -15.18% 26.61% 45.07% 48.96%
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Magnum multiplier plus
-26.16% 5.57% -11.26% -18.00% 21.44% 45.28% 59.31%
BenchmarkBSE100
-17.53% 11.74% -2.56% 11.47% 30.71% 40.46% 44.24%
Now in the above table, we have two funds from SBI ie; magnum equity fund and magnum
multiplier plus following the same benchmark i.e; BSE 100. In this case, we have compared
their returns during various time periods. We have their returns YTD, during last 1 month,
3month, 6 months, 1 year, 3 year and 5 year. If we look at a long term perspective, then
magnum multiplier plus totally outperformed both magnum equity fund as well as bse 100. In
case of 5 year returns, neither the benchmark nor the magnum equity fund stands anywhere
near multiplier plus. It is greater than equity fund by 10.35% and from benchmark by
15.07%. but in case of 3 year returns, surely multiplier plus gave the maximum return but it
fell sharply in comparison to its 5 yr return. A 45.28% return scored over equity fund just by
a margin of 0.21% and benchmark by a mere 4.28%. now moving down to 1 yr return, we
can clearly see that bse 100 emerges as a true winner. The benchmark gave a return of
30.71% but both the funds failed to match it even.
But the ultimate surprise comes when we look at the datas of last 6 months. Here not only the
fund mangers failed to beat or match the market. Rather they also performed as laggards,
giving negative returns. When the bse 100 gave returns of 11.47%, these funds were trailing
by 29.47% and 26.65% which is a huge figure. In th last 3 months too, both the funds were
behind bse100 but all the three gave negative returns and the difference between them and
benchmark was narrowed down. Again, during last 1 month return of all three got positive
but the funds always remained behind the benchmark. The bse 100 outscored multiplier plus
and equity fund by 6.17% and 2.72% respectively. Similarly, the YTD return of all 3 is
negative even then the benchmark is at a better position than the funds.
From the following analysis we can infer that inspite of all the steps taken; it is not always
possible for the fund managers to always beat the market. Also, the past performance just
tells the background and history of the fund, by looking at it we cannot interpret that the fund
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will perform in the same way in the future too. The datas can be presented in the form of
a graph as follow:
Quantitative data:
Ratios Magnum equity fund Magnum multiplier plus
Standard deviation 26.00% 26.90%
Beta 0.96% 0.95%
r-squared
0.84%
Sharpe ratio 1.46% 1.42%
Portfolio turnover 31% 25%
Total expense ratio 2.5% 2.5%
Analysis:
We can see that the standard deviation of both the funds are more or less same
even then the S.D of multiplier plus is greater than that of equity fund by 0.90%.
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Generally higher the SD higher is the risk and vice-versa. Therefore, magnum
multiplier plus is riskier than magnum equity fund.
The beta of magnum equity fund is higher than that of magnum multiplier plus.
Therefore, equity fund is more volatile than multiplier plus. But beta of both the
funds is smaller than 1 that means both the funds are less volatile than the market
index. As r- squared values are more than 0.80 in both the cases, we can rely on the
usage of beta for the analysis of these funds.
A look at the Sharpe ratio indicates that magnum equity has outperformed multiplier
plus. A higher Sharpe ratio of equity fund depicts that these return have been
generated taking lesser risk than the multiplier plus. It Is less volatile than the other.
R-squared of both the funds are greater than 0.80. it indicates that beta can be used
as a reliable measure to analyze the performance of these funds. Magnum equity
fund’s R- squared is higher. So its beta is more reliable.
Portfolio turnover ratio of magnum equity fund is higher than multiplier plus. It
mean the manager is frequently churning the portfolio of equity fund than of
multiplier plus. It may lead to an increase in expenses but could be ignored if could
generate higher return by changing the composition of portfolio.
Total expense ratio of both the funds are same i.e.; 2.5%
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In the form of a chart:
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Measuring Risks:
Risk Measure Implication Impact On Investor
High average maturity and
modified duration
More sensitive to interest
rate changes
Higher volatility in returns
Low average maturity and
modified duration
Less sensitive to interest
rate changes
Lower volatility in returns
Greater allocation to high
credit rated instruments
Low risk default Lower yield with lower risk
Greater allocation to low
rated instruments
Higher risk of default Higher yield but with
greater risk
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INVESTMENT STRATEGIES
1. Systematic Investment Plan: under this a fixed sum is invested each month
on a fixed date of a month. Payment is made through post dated cheques or
direct debit facilities. The investor gets fewer units when the NAV is high and
more units when the NAV is low. This is called as the benefit of Rupee Cost
Averaging (RCA)
2. Systematic Transfer Plan: under this an investor invest in debt oriented
fund and give instructions to transfer a fixed sum, at a fixed interval, to an
equity scheme of the same mutual fund.
3. Systematic Withdrawal Plan: if someone wishes to withdraw from a
mutual fund then he can withdraw a fixed amount each month.
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RISK V/S. RETURN:
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Mutual Fund Companies in India
The concept of mutual funds in India dates back to the year 1963. The era between 1963 and 1987 marked the existance of only one mutual fund company in India with Rs. 67bn assets under management (AUM), by the end of its monopoly era, the Unit Trust of India (UTI). By the end of the 80s decade, few other mutual fund companies in India took their position in mutual fund market .The new entries of mutual fund companies in India were SBI Mutual Fund, Canbank Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund.The succeeding decade showed a new horizon in indian mutual fund industry. By the end of 1993, the total AUM of the industry was Rs. 470.04 bn. The private sector funds started penetrating the fund families. In the same year the first Mutual Fund Regulations came into existance with re-registering all mutual funds except UTI. The regulations were further given a revised shape in 1996.Kothari Pioneer was the first private sector mutual fund company in India which has now merged with Franklin Templeton. Just after ten years with private sector players penetration, the total assets rose up to Rs. 1218.05 bn. Today there are 33 mutual fund companies in India.
Major Mutual Fund Companies in India:-
ABN AMRO Mutual Fund:-
ABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO Trustee (India) Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO Asset Management (India) Ltd. was incorporated on November 4, 2003. Deutsche Bank A G is the custodian of ABN AMRO Mutual Fund.
Birla Sun Life Mutual Fund :-
Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life Financial. Sun Life Financial is a golbalorganisation evolved in 1871 and is being represented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart from India. Birla Sun Life Mutual Fund follows a conservative long-term approach to investment. Recently it crossed AUM of Rs. 10,000 crores.
Bank of Baroda Mutual Fund (BOB Mutual Fund):-
Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30, 1992 under the sponsorship of Bank of Baroda. BOB Asset Management Company Limited is the AMC of BOB Mutual Fund and was incorporated on November 5, 1992. Deutsche Bank AG is the custodian.
HDFC Mutual Fund:-
HDFC Mutual Fund was setup on June 30, 2000 with two sponsorersnemely Housing Development Finance Corporation Limited and Standard Life Investments Limited.
HSBC Mutual Fund:-
HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital Markets (India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual Fund acts as the Trustee Company of
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HSBC Mutual Fund..
ING Vysya Mutual Fund:-
ING Vysya Mutual Fund was setup on February 11, 1999 with the same named Trustee Company. It is a joint venture of Vysya and ING. The AMC, ING Investment Management (India) Pvt. Ltd. was incorporated on April 6, 1998.
Prudential ICICI Mutual Fund:-
The mutual fund of ICICI is a joint venture with Prudential Plc. of America, one of the largest life insurance companies in the US of A. Prudential ICICI Mutual Fund was setup on 13th of October, 1993 with two sponsorers, Prudential Plc. and ICICI Ltd. The Trustee Company formed is Prudential ICICI Trust Ltd. and the AMC is Prudential ICICI Asset Management Company Limited incorporated on 22nd of June, 1993.
Sahara Mutual Fund:-
Sahara Mutual Fund was set up on July 18, 1996 with Sahara India Financial Corporation Ltd. as the sponsor. Sahara Asset Management Company Private Limited incorporated on August 31, 1995 works as the AMC of Sahara Mutual Fund. The paid-up capital of the AMC stands at Rs 25.8 crore.
State Bank of India Mutual Fund:-
State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch offshor fund, the India Magnum Fund with a corpus of Rs. 225 cr. approximately. Today it is the largest Bank sponsored Mutual Fund in India. They have already launched 35 Schemes out of which 15 have already yielded handsome returns to investors. State Bank of India Mutual Fund has more than Rs. 5,500 Crores as AUM. Now it has an investor base of over 8 Lakhs spread over 18 schemes.
Tata Mutual Fund:-
Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsorers for Tata Mutual Fund are Tata Sons Ltd., and Tata Investment Corporation Ltd. The investment manager is Tata Asset Management Limited and its Tata Trustee Company Pvt. Limited. Tata Asset Management Limited's is one of the fastest in the country with more than Rs. 7,703 crores (as on April 30, 2005) of AUM.
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Kotak Mahindra Mutual Fund:-
Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. It is presently having more than 1,99,818 investors in its various schemes. KMAMC started its operations in December 1998. Kotak Mahindra Mutual Fund offers schemes catering to investors with varying risk - return profiles. It was the first company to launch dedicated gilt scheme investing only in government securities.
Unit Trust of India Mutual Fund:-
UTI Asset Management Company Private Limited, established in Jan 14, 2003, manages the UTI Mutual Fund with the support of UTI Trustee Company Privete Limited. UTI Asset Management Company presently manages a corpus of over Rs.20000 Crore. The sponsorers of UTI Mutual Fund are Bank of Baroda (BOB), Punjab National Bank (PNB), State Bank of India (SBI), and Life Insurance Corporation of India (LIC). The schemes of UTI Mutual Fund are Liquid Funds, Income Funds, Asset Management Funds, Index Funds, Equity Funds and Balance Funds.
Reliance Mutual Fund:-
Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882. The sponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co. Limited is the Trustee. It was registered on June 30, 1995 as Reliance Capital Mutual Fund which was changed on March 11, 2004. Reliance Mutual Fund was formed for launching of various schemes under which units are issued to the Public with a view to contribute to the capital market and to provide investors the opportunities to make investments in diversified securities.
Standard Chartered Mutual Fund:-
Standard Chartered Mutual Fund was set up on March 13, 2000 sponsored by Standard Chartered Bank. The Trustee is Standard Chartered Trustee Company Pvt. Ltd. Standard Chartered Asset Management Company Pvt. Ltd. is the AMC which was incorporated with SEBI on December 20,1999.
Franklin Templeton India Mutual Fund:-
The group, Frnaklin Templeton Investments is a California (USA) based company with a global AUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the largest financial services groups in the world. Investors can buy or sell the Mutual Fund through their financial advisor or through mail or through their website. They have Open end Diversified Equity schemes, Open end Sector Equity schemes, Open end Hybrid schemes, Open end Tax Saving schemes, Open end Income and Liquid schemes, Closed end Income schemes and Open end Fund of Funds schemes to offer.
Morgan Stanley Mutual Fund India:-
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Morgan Stanley is a worldwide financial services company and its leading in the market in securities, investmenty management and credit services. Morgan Stanley Investment Management (MISM) was established in the year 1975. It provides customized asset management services and products to governments, corporations, pension funds and non-profit organisations. Its services are also extended to high net worth individuals and retail investors. In India it is known as Morgan Stanley Investment Management Private Limited (MSIM India) and its AMC is Morgan Stanley Mutual Fund (MSMF). This is the first close end diversified equity scheme serving the needs of Indian retail investors focussing on a long-term capital appreciation.
Escorts Mutual Fund:-
Escorts Mutual Fund was setup on April 15, 1996 with Excorts Finance Limited as its sponsor. The Trustee Company is Escorts Investment Trust Limited. Its AMC was incorporated on December 1, 1995 with the name Escorts Asset Management Limited.
Alliance Capital Mutual Fund:-
Alliance Capital Mutual Fund was setup on December 30, 1994 with Alliance Capital Management Corp. of Delaware (USA) as sponsorer. The Trustee is ACAM Trust Company Pvt. Ltd. and AMC, the Alliance Capital Asset Management India (Pvt) Ltd. with the corporate office in Mumbai.
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Benchmark Mutual Fund:-
Benchmark Mutual Fund was setup on June 12, 2001 with Niche Financial Services Pvt. Ltd. as the sponsorer and Benchmark Trustee Company Pvt. Ltd. as the Trustee Company. Incorporated on October 16, 2000 and headquartered in Mumbai, Benchmark Asset Management Company Pvt. Ltd. is the AMC.
Canbank Mutual Fund:-
Canbank Mutual Fund was setup on December 19, 1987 with Canara Bank acting as the sponsor. Canbank Investment Management Services Ltd. incorporated on March 2, 1993 is the AMC. The Corporate Office of the AMC is in Mumbai.
Chola Mutual Fund:-
Chola Mutual Fund under the sponsorship of Cholamandalam Investment & Finance Company Ltd. was setup on January 3, 1997. Cholamandalam Trustee Co. Ltd. is the Trustee Company and AMC is Cholamandalam AMC Limited.
LIC Mutual Fund:-
Life Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. It contributed Rs. 2 Crores towards the corpus of the Fund. LIC Mutual Fund was constituted as a Trust in accordance with the provisions of the Indian Trust Act, 1882. . The Company started its business on 29th April 1994. The Trustees of LIC Mutual Fund have appointed JeevanBimaSahayog Asset Management Company Ltd as the Investment Managers for LIC Mutual Fund.
GIC Mutual Fund:-
GIC Mutual Fund, sponsored by General Insurance Corporation of India (GIC), a Government of India undertaking and the four Public Sector General Insurance Companies, viz. National Insurance Co. Ltd (NIC), The New India Assurance Co. Ltd. (NIA), The Oriental Insurance Co. Ltd (OIC) and United India Insurance Co. Ltd. (UII) and is constituted as a Trust in accordance with the provisions of the Indian Trusts Act, 1882.
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MUTUAL FUNDS—RISK ASSOCIATED
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.
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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 company’s 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
company’s 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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Chapter VI
Conclusion
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CONCLUSION
Mutual funds are the best investment option for those seeking financial advice in making
investment decisions. It is also a best option for novice investors. Tailor made mutual funds
need to be developed to completely satisfy the investor requirements.The trick for converting
a person with no knowledge of mutual funds to a new Mutual Fund customer is to understand
which of the potential investors are more likely to buy mutual funds and to use the right
arguments in the sales process that customers will accept as important and relevant to their
decision.
As information and awareness is rising more and more people are enjoying the benefits of
investing in mutual funds. The main reason the number of retail mutual fund investors
remains small is that nine in ten people with incomes in India do not know that mutual funds
exist. But once people are aware of mutual fund investment opportunities, the number who
decide to invest in mutual funds increases to as many as one in five people
This Project gave me a great learning experience and at the same time it gave me enough
scope to implement my analytical ability. The analysis and advice presented in this Project
Report is based on market research on the saving and investment practices of the investors
and preferences of the investors for investment in Mutual Funds.
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BIBLIOGRAPHY
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BIBLIOGRAPHY
AUTHOR NAME TITLE OF THE BOOK EDITION/YEAR
1. PHILIP KOTLER MARKETING MANAGEMENT MILLENIUM EDITION2000
2. S.A. CHUNAWALLA
ESSENTIALS OF MARKETING RESEARCH 1995
3. D.D.SHARMA MARKETING RESEARCH MILLENIUM EDITION2000
4. JOHN.A.HASLEM MUTUAL FUNDS – RISK ANALYSIS FOR DECISIION MAKING
2003
WEBSITES
www.amfi.com
www.mutualfundsindia.com
www.utimf.com
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