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CERTIFICATE OF COMPLETION

This is certify that the Final Project report entitled Investment avenues: a
comparative study of mutual funds v/s equities submitted Dissertation report
of

the

requirement

for

the

.is

degree

of

work

carried

MBA,
out

affiliated

to

the

by ..,

Roll

No. under my supervision and guidance.

Project Guide:

DECLARATION
I, the undersigned, hereby declare that the dissertation report submitted to my
college i.e. in partial fulfillment for the Degree
of Master of Business administration on Investment avenues: a comparative
study of mutual funds v/s equities, is a result of my own work under continuous
guidance and kind co-operation of our college faculty member, ..
I have not submitted this training report to any other university for the award of
any degree.

ACKNOWLEDGEMENT
I have been extremely fortunate that I have had the opportunity of working under
.. I would especially like to thank
him for his guidance and support in completing this report and giving his valuable
insights and giving me suggestions regarding the same, which has helped my
project to shape up the way it, is now. It was only because of his helpful nature
that I was given absolute freedom to explore new directions in this project.
I would take this opportunity to thank, Mr. ..
for giving me the opportunity to pursue my summer internship at a world class
organization like Reliance, and for assigning me a good project, under
responsible persons. I would be committing a grave injustice if I did not mention
the

help

extended

to

me

by

the

Operations

Team

(Specially

Mr.. and the other members of this wonderful Reliance


Mutual Fund Chandigarh Family.
Finally I would like to thank all my friends who have helped me for the
completion of this report.

EXECUTIVE SUMMARY
Dissertation work is a part of our curriculum that gives us the knowledge about
the practical work in any organization and makes are stand in an organization.
This also helps to understand & correlate the theoretical concepts better which
remains uncovered in the classrooms. I have prepared this report in the process of
my postgraduate degree in business management.
The topic that has been taken for the project is Investment avenues: a
comparative study of mutual funds v/s equities.
Any kind of learning is incomplete till it is practically applied in the concerned
field. Only then a person understand and get hold of even the minutest details of
what he/she has learnt in his stay at the institute doing his/her MBA. So, to
practically apply what I had gained in the past two semesters in the MBA
programme, I underwent two months summer training at Reliance Mutual Fund,
Chandigarh. It has been a wonderful learning experience, which has given me an
insight into what goes on in the corporate world and this stay at the Reliance
office has helped me learn the intricate details of the corporate culture and what
life has in store for most of us doing our MBA. I have compiled this report to
share all my experiences with all of you. In this report, I have explained the
project, which I undertook with Reliance Mutual.

TABLE OF CONTENTS
S No.
1

Topic
Chapter 1

Chapter 2

Chapter 3

Page No.

Industry Profile
1.1 Introduction to Mutual Funds

2-20

1.2 Latest Developments

20-22

Company Profile
2.1 Reliance Capital Asset Management Ltd.

24-26

2.2 Reliance Mutual Funds

26-35

Research Methodology
3.1 Research Problem

37

3.2 Research Objectives

37

3.3 Sources of Data

37

3.4 Tools Applied

37-40

Chapter 4

Analysis

42-72

Chapter 5

Conclusion

74-75

Chapter 6

Suggestions and Recommendations

77

Bibliography

78

List of Tables

79

List of Charts

80

Annexure

INVESTMENT AVENUES: A COMPARATIVE


STUDY OF MUTUAL FUNDS V/S EQUITIES
Conducted at Reliance capital (AMC), Chandigarh.

Submitted to UTU in the partial fulfillment of the requirement for


degree
Of
Masters of Business Administration
(Specialization Finance)
By: -

..

LIST OF TABLES

S.NO
1

TOPIC
PORTFOLIO DIVERSIFICATION

PAGE NO.
43 44

2
3
4
5

BETA
MARKET PRICE OF EQUITY STOCKS
ONE YEAR RETURN
SCHEME RETURN V/S BENCHMARK

47
49-50
50
52

RETURN
INITIAL EXPENSES OF INVESTING IN

54

STOCKS
BROKERAGE ON DIFFERENT EQUITY

54

8
9
10

INVESTMENTS
LONG TERM CAPITAL GAIN
SHORT TERM CAPITAL GAIN
TAXES ON EQUITY AT TIME OF

55
55
56

11
12
13
14

WITHDRAWAL
SYSTEMATIC INVESTMENT
TREND ANALYSIS
CORRELATION
SHARPE RATIO

58
68
70
71

LIST OF GRAPHS
S.NO
1
2
3
4
5
6
7
8
9

TOPIC
ASSETS UNDER MANAGEMENT
RISK HIERARCHY
MUTUAL FUNDS V/S FIIs
BETA
ONE YEAR RETURN %
SCHEME RETURN V/S BENCHMARK
RETURN
TREND ANALYSIS
CORRELATION
SHARPE RATIO

PAGE NO.
10
20
22
48
51
52
69
70
72

INDUSTRY
PROFILE

10

MUTUAL FUND: AN INTRODUCTION


Mutual funds are financial intermediaries, which collect the savings of investors
and invest them in a large and well-diversified portfolio of securities such as
money market instruments, corporate and government bonds and equity shares of
joint stock companies. A mutual fund is a pool of common funds invested by
different investors, who have no contact with each other. Mutual funds are
conceived as institutions for providing small investors with avenues of
investments in the capital market. Since small investors generally do not have
adequate time, knowledge, experience and resources for directly accessing the
capital market, they have to rely on an intermediary, which undertakes informed
investment decisions and provides consequential benefits of professional
expertise. The raison dtre of mutual funds is their ability to bring down the
transaction costs. The advantages for the investors are reduction in risk, expert
professional management, diversified portfolios, liquidity of investment and tax
benefits. By pooling their assets through mutual funds, investors achieve
economies of scale. The interests of the investors are protected by the SEBI,
which acts as a watchdog. Mutual funds are governed by the SEBI (Mutual
Funds) Regulations, 1993.

11

12

MUTUAL FUND CONSTITUENTS


All mutual funds comprise four constituents Sponsors, Trustees, Asset
Management Company (AMC) and Custodians.

Sponsors: The sponsors initiate the idea to set up a mutual fund. It could be a
registered company, scheduled bank or financial institution. A sponsor has to
satisfy certain conditions, such as capital, record (at least five years operation in
financial services), de-fault free dealings and general reputation of fairness. The
sponsors appoint the Trustee, AMC and Custodian. Once the AMC is formed, the
sponsor is just a stakeholder.

Trust/ Board of Trustees: Trustees hold a fiduciary responsibility towards


unit holders by protecting their interests. Trustees float and market schemes, and
secure necessary approvals. They check if the AMCs investments are within
well-defined limits, whether the funds assets are protected, and also ensure that
unit holders get their due returns. They also review any due diligence by the
AMC. For major decisions concerning the fund, they have to take the unit holders
consent. They submit reports every six months to SEBI; investors get an annual
report. Trustees are paid annually out of the funds assets 0.5 percent of the
weekly net asset value.

Fund Managers/ AMC: They are the ones who manage money of the
investors. An AMC takes decisions, compensates investors through dividends,
maintains proper accounting and information for pricing of units, calculates the
NAV, and provides information on listed schemes. It also exercises due diligence

13

on investments, and submits quarterly reports to the trustees. A funds AMC can
neither act for any other fund nor undertake any business other than asset
management. Its net worth should not fall below Rs. 10 crore. And, its fee should
not exceed 1.25 percent if collections are below Rs. 100 crore and 1 percent if
collections are above Rs. 100 crore. SEBI can pull up an AMC if it deviates from
its prescribed role.

Custodian: Often an independent organization, it takes custody of securities


and other assets of mutual fund. Its responsibilities include receipt and delivery of
securities, collecting income-distributing dividends, safekeeping of the units and
segregating assets and settlements between schemes.

14

MUTUAL FUND: RELATIONSHIP AMONGSTTHE ENTITIES


INVOLVED

SPONSOR

REGISTRAR

MAINTIAN RECORDS OF AND SERVICES OF

TRUSTEE COMPANY

SETS UP

ACT AS TRUSTEE TO THE UNITHOLDERS


OF (AS A TRUST)
MUTUAL FUND
SUBSCRIBE THE UNITS OF
APPOINTS

INVESTORS

ASSET MANAFEMENT COMPANY


MANGES THE INVESTMENT
SAFE
OFKEEPS THE ASSETS OF

CUSTODIAN

15

JOURNEY SO FAR
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 the. The
history of mutual funds in India can be broadly divided into four distinct phases

First Phase 1964-87


Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was
set up by the Reserve Bank of India and functioned under the Regulatory and
administrative control of the Reserve Bank of India. In 1978 UTI was de-linked
from the RBI and the Industrial Development Bank of India (IDBI) took over the
regulatory and administrative control in place of RBI. The first scheme launched
by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of
assets under management.

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


1987 marked the entry of non- UTI, public sector mutual funds set up by public
sector banks and Life Insurance Corporation of India (LIC) and General Insurance
Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund
established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab
National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank
of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its
mutual fund in June 1989 while GIC had set up its mutual fund in December
1990. At the end of 1993, the mutual fund industry had assets under management
of Rs.47,004 crores.
16

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


With the entry of private sector funds in 1993, a new era started in the Indian
mutual fund industry, giving the Indian investors a wider choice of fund families.
Also, 1993 was the year in which the first Mutual Fund Regulations came into
being, under which all mutual funds, except UTI were to be registered and
governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton)
was the first private sector mutual fund registered in July 1993. The 1993 SEBI
(Mutual Fund) Regulations were substituted by a more comprehensive and
revised Mutual Fund Regulations in 1996. The industry now functions under the
SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went
on increasing, with many foreign mutual funds setting up funds in India and also
the industry has witnessed several mergers and acquisitions. As at the end of
January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.
The Unit Trust of India with Rs.44, 541 crores of assets under management was
way ahead of other mutual funds.

Fourth Phase since February 2003


In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI
was bifurcated into two separate entities. One is the Specified Undertaking of the
Unit Trust of India with assets under management of Rs.29,835 crores as at the
end of January 2003, representing broadly, the assets of US 64 scheme, assured
return and certain other schemes. The Specified Undertaking of Unit Trust of
India, functioning under an administrator and under the rules framed by

17

Government of India and does not come under the purview of the Mutual Fund
Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB,
BOB and LIC. It is registered with SEBI and functions under the Mutual Fund
Regulations. With the bifurcation of the erstwhile UTI which had in March 2000
more than Rs.76,000 crores of assets under management and with the setting up
of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and
with recent mergers taking place among different private sector funds, the mutual
fund industry has entered its current phase of consolidation and growth. As at the
end of March 2007, total assets under management are Rs.326388 crores.

18

The graph indicates the growth of assets over the years.

GRAPH 1: ASSETS UNDER MANAGEMENT

19

FUTURE SCENARIO:
The asset base will continue to grow at an annual rate of about 30 to 35 % over
the next few years as investors shift their assets from banks and other traditional
avenues. Some of the older public and private sector players will either close shop
or be taken over.
Out of ten public sector players five will sell out, close down or merge with
stronger players in three to four years. In the private sector this trend has already
started with two mergers and one takeover. Here too some of them will down their
shutters in the near future to come.
But this does not mean there is no room for other players. The market will witness
a flurry of new players entering the arena. There will be a large number of offers
from various asset management companies in the time to come. Some big names
like Fidelity, Principal, Old Mutual etc. are looking at Indian market seriously.
One important reason for it is that most major players already have presence here
and hence these big names would hardly like to get left behind.
In the U.S. most mutual funds concentrate only on financial funds like equity and
debt. Some like real estate funds and commodity funds also take an exposure to
physical assets. The latter type of funds are preferred by corporates who want to
hedge their exposure to the commodities they deal with.
For instance, a cable manufacturer who needs 100 tons of Copper in the month of
January could buy an equivalent amount of copper by investing in a copper fund.

20

For Example, Permanent Portfolio Fund, a conservative U.S. based fund invests a
fixed percentage of its corpus in Gold, Silver, Swiss francs, specific stocks on
various bourses around the world, short term and long-term U.S. treasuries etc.
In U.S.A. apart from bullion funds there are copper funds, precious metal funds
and real estate funds (investing in real estate and other related assets as well.).In
India, the Canada based Dundee mutual fund is planning to launch a gold and a
real estate fund before the year-end.
In developed countries like the U.S.A there are funds to satisfy everybodys
requirement, but in India only the tip of the iceberg has been explored. In the near
future India too will concentrate on financial as well as physical funds.
The mutual fund industry is awaiting the introduction of DERIVATIVES in the
country as this would enable it to hedge its risk and this in turn would be reflected
in its Net Asset Value (NAV).
SEBI is working out the norms for enabling the existing mutual fund schemes to
trade in Derivatives. Importantly, many market players have called on the
Regulator to initiate the process immediately.
ROAD TO FUTURE
By December 2004, Indian mutual fund industry reached Rs 1,50,537 crores. It is
estimated that by 2010 March-end, the total assets of all scheduled commercial
banks should be Rs 40,90,000 crores.

21

The annual composite rate of growth is expected 13.4% during the rest of the
decade. In the last 5 years we have seen annual growth rate of 9%. According to
the current growth rate, by year 2010, mutual fund assets will be double.

Some facts for the growth of mutual funds in India


100% growth in the last 6 years.
Numbers of foreign AMCs are in the queue to enter the Indian markets like
Fidelity Investments, US based, with over US$1trillion assets under management
worldwide.
Our saving rate is over 23%, highest in the world. Only channelizing these
savings in mutual funds sector is required.
We have approximately 29 mutual funds which are much less than US having
more than 800. There is a big scope for expansion.
'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are
concentrating on the 'A' class cities. Soon they will find scope in the growing
cities.
Mutual fund can penetrate rural like the Indian insurance industry with simple and

limited products.
SEBI allowing the MF's to launch commodity mutual funds.
Emphasis on better corporate governance.
Trying to curb the late trading practices.
Introduction of Financial Planners who can provide need based advice.

CLASSIFICATION OF MUTUAL FUND SCHEMES


Any mutual fund has an objective of earning income for the investors and/ or
getting increased value of their investments. To achieve these objectives mutual
funds adopt different strategies and accordingly offer different schemes of

22

investments. On this basis the simplest way to categorize schemes would be to


group these into two broad classifications:

Operational Classification and Portfolio Classification.


Operational classification highlights the two main types of schemes, i.e., openended and close-ended which are offered by the mutual funds.

23

Portfolio classification projects the combination of investment instruments and


investment avenues available to mutual funds to manage their funds. Any
portfolio scheme can be either open ended or close ended.

A.

Operational Classification

(a) Open Ended Schemes: As the name implies the size of the scheme
(Fund) is open i.e., not specified or pre-determined. Entry to the fund is always
open to the investor who can subscribe at any time. Such fund stands ready to buy
or sell its securities at any time. It implies that the capitalization of the fund is
constantly changing as investors sell or buy their shares. Further, the shares or
units are normally not traded on the stock exchange but are repurchased by the
fund at announced rates. Open-ended schemes have comparatively better liquidity
despite the fact that these are not listed. The reason is that investors can any time
approach mutual fund for sale of such units. No intermediaries are required.
Moreover, the realizable amount is certain since repurchase is at a price based on
declared net asset value (NAV). No minute to minute fluctuations in rates haunt
the investors. The portfolio mix of such schemes has to be investments, which are
actively traded in the market. Otherwise, it will not be possible to calculate NAV.
This is the reason that generally open-ended schemes are equity based. Moreover,
desiring frequently traded securities, open-ended schemes hardly have in their
portfolio shares of comparatively new and smaller companies since these are not
generally traded. In such funds, option to reinvest its dividend is also available.
Since there is always a possibility of withdrawals, the management of such funds

24

becomes more tedious as managers have to work from crisis to crisis. Crisis may
be on two fronts, one is, that unexpected withdrawals require funds to maintain a
high level of cash available every time implying thereby idle cash. Fund managers
have to face questions like what to sell. He could very well have to sell his most
liquid assets. Second, by virtue of this situation such funds may fail to grab
favorable opportunities. Further, to match quick cash payments, funds cannot
have matching realization from their portfolio due to intricacies of the stock
market. Thus, success of the open-ended schemes to a great extent depends on the
efficiency of the capital market and the selection and quality of the portfolio.
(b) Close Ended Schemes: Such schemes have a definite period after which
their shares/ units are redeemed. Unlike open-ended funds, these funds have fixed
capitalization, i.e., their corpus normally does not change throughout its life
period. Close ended fund units trade among the investors in the secondary market
since these are to be quoted on the stock exchanges. Their price is determined on
the basis of demand and supply in the market. Their liquidity depends on the
efficiency and understanding of the engaged broker. Their price is free to deviate
from NAV, i.e., there is every possibility that the market price may be above or
below its NAV. If one takes into account the issue expenses, conceptually close
ended fund units cannot be traded at a premium or over NAV because the price of
a package of investments, i.e., cannot exceed the sum of the prices of the
investments constituting the package. Whatever premium exists that may exist
only on account of speculative activities. In India as per SEBI (MF) Regulations
every mutual fund is free to launch any or both types of schemes.

25

B. Portfolio Classification of Funds:


Following are the portfolio classification of funds, which may be offered. This
classification may be on the basis of (a) Return, (b) Investment Pattern, (c)
Specialized sector of investment, (d) Leverage and (e) Others.

(a) Return based classification:


To meet the diversified needs of the investors, the mutual fund schemes are made
to enjoy a good return. Returns expected are in form of regular dividends or
capital appreciation or a combination of these two.
i. Income Funds: For investors who are more curious for returns, Income funds
are floated. Their objective is to maximize current income. Such funds distribute
periodically the income earned by them. These funds can further be splitted up
into categories: those that stress constant income at relatively low risk and those
that attempt to achieve maximum income possible, even with the use of leverage.
Obviously, the higher the expected returns, the higher the potential risk of the
investment.
ii. Growth Funds: Such funds aim to achieve increase in the value of the
underlying investments through capital appreciation. Such funds invest in growth
oriented securities which can appreciate through the expansion production

facilities in long run. An investor who selects such funds should be able to assume
a higher than normal degree of risk.

26

iii. Conservative Funds: The fund with a philosophy of all things to all issue
offer document announcing objectives as: (i) to provide a reasonable rate of
return, (ii) To protect the value of investment and, (iii) to achieve capital
appreciation consistent with the fulfillment of the first two objectives. Such funds
which offer a blend of immediate average return and reasonable capital
appreciation are known as middle of the road funds. Such funds divide their
portfolio in common stocks and bonds in a way to achieve the desired objectives.
Such funds have been most popular and appeal to the investors who want both
growth and income.

(b) Investment Based Classification:


Mutual funds may also be classified on the basis of securities in which they
invest. Basically, it is renaming the subcategories of return based classification.
i. Equity Fund: Such funds, as the name implies, invest most of their investible
shares in equity shares of companies and undertake the risk associated with the
investment in equity shares. Such funds are clearly expected to outdo other funds
in rising market, because these have almost all their capital in equity. Equity funds
again can be of different categories varying from those that invest exclusively in
high quality blue chip companies to those that invest solely in the new,
unestablished companies. The strength of these funds is the expected capital
appreciation. Naturally, they have a higher degree of risk.
ii. Bond Funds: such funds have their portfolio consisted of bonds, debentures,
etc. this type of fund is expected to be very secure with a steady income and little

27

or no chance of capital appreciation. Obviously risk is low in such funds. In this


category we may come across the funds called Liquid Funds which specialize in
investing short-term money market instruments. The emphasis is on liquidity and
is associated with lower risks and low returns.
iii. Balanced Fund: The funds, which have in their portfolio a reasonable mix of
equity and bonds, are known as balanced funds. Such funds will put more
emphasis on equity share investments when the outlook is bright and will tend to
switch to debentures when the future is expected to be poor for shares.

(c) Sector Based Funds:


There are number of funds that invest in a specified sector of economy. While
such funds do have the disadvantage of low diversification by putting all their all
eggs in one basket, the policy of specializing has the advantage of developing in
the fund managers an intensive knowledge of the specific sector in which they are
investing. Sector based funds are aggressive growth funds which make
investments on the basis of assessed bright future for a particular sector. These
funds are characterized by high viability, hence more risky.

Risk Hierarchy of Different Mutual Funds

28

GRAPH 2: RISK HIERARCHY


Return
Sectoral funds
Equity funds
Index funds
Balanced funds

Debt Funds
Gilt funds
ST debt funds
Liquid funds

Risk

Latest Developments
SEBI has capped mutual funds' exposure to short-term bank deposits at 15 per
cent in order to ensure that the money they have collected are deployed in line
with investment objectives. "Short term" will be treated as a period not exceeding
91 days, SEBI has stated, adding that no fund can put more than 15 per cent of its
net assets in deposits of all scheduled commercial banks put together.
This, however, may be increased to 20 per cent, provided the trustees give prior
approval. Additionally, parking of funds in short-term deposits of associate and
sponsor scheduled commercial banks together will not exceed 20 per cent of the
total deployment in short-term deposits.

29

No fund will park more than 10 per cent of its net assets in short-term deposits
with any one scheduled commercial bank (including its subsidiaries). Incidentally,
trustees will need to ensure that no money is put in short-term deposits of a bank
which has invested in that fund.
For liquid and debt-oriented funds, an asset management company (AMC) will
not be able to charge any investment management and advisory fee for parking
money in short-term deposits.
SEBI

had

formed

committee

to

look

at

launching

Dedicated

Infrastructure Funds (DIF) in India.


The central idea is to channelise the household savings in building Indias
infrastructure. As now mutual funds only invest in listed companies involved in
infrastructure and related services. The committee recommends ways in which
mutual funds can invest in unlisted companies involved in infrastructure.
The monetary policy announced by the Reserve Bank of India (RBI) was one of
the major developments in April. This time around the RBI reiterated its intention
to provide Indian investors increased access/flexibility to international asset
markets. A lot of measures have been aimed in that direction.
As far as the retail investors finances are concerned, there are at least 3
announcements in this monetary policy that must rivet his attention - reduced
rates on NRI deposits, AMCs can invest in overseas markets up to US $ 4 bn and
the reduced risk weight age on home loans.This was a relatively rewarding month

30

for investors as stock markets rallied to close in positive terrain. The BSE Sensex
posted a gain of 6.12% to close at 13,872 points; the S&P CNX Nifty ended at
4,088 points (up by 6.96%). But the winners were clearly the mid cap stocks; the
CNX Midcap rose by 8.16%, before settling at 5,246 points.
GRAPH 3: MUTUAL FUNDS V/S FIIs

Foreign Institutional Investors (FIIs) and mutual funds were both buyers in the
domestic stock markets. In April, FIIs bought equities to the tune of Rs 51,739 m
and out-purchased mutual funds (Rs 11,241 m) by a huge margin.
Some trend or the other continues to grip the mutual fund industry. After SEBI
(Securities and Exchange Board of India) made it difficult for the AMCs (asset
management companies) to launch open-ended mutual funds, closed-ended funds
have become the order of the day.

31

COMPANY
PROFILE

Reliance Capital Asset Management Ltd.

32

Reliance Capital Asset Management Limited (RCAM), a company registered


under the Companies Act, 1956 was appointed to act as the Investment Manager
of Reliance Mutual Fund. Reliance Capital Asset Management Limited is a
wholly owned subsidiary of Reliance Capital Limited, the sponsor. The entire
paid-up capital (100%) of Reliance Capital Asset Management Limited is held by
Reliance Capital Limited. Reliance Capital Asset Management Limited was
approved as the Asset Management Company for the Mutual Fund by SEBI vide
their letter no IIMARP/1264/95 dated June 30, 1995. The Mutual Fund has
entered into an Investment Management Agreement (IMA) with RCAM dated
May 12, 1995 and was amended on August 12, 1997 in line with SEBI (Mutual
Funds) Regulations, 1996. Pursuant to this IMA, RCAM is authorized to act as
Investment Manager of Reliance Mutual Fund. The net worth of the Asset
Management Company including preference shares as on March 31, 2005 is
Rs.30.13 crores.
Reliance Mutual Fund has launched twenty seven Schemes till date, namely:
1. Reliance Vision Fund (September 1995)
2. Reliance Growth Fund (September 1995)
3. Reliance Income Fund (December 1997)
4. Reliance Liquid Fund (March 1998)
5. Reliance Medium Term Fund (August 2000)
6. Reliance Short Term Fund (December 2002)
7. Reliance Fixed Term Scheme (March 2003)
8. Reliance Banking Fund (May 2003)

33

9. Reliance Gilt Securities Fund (July 2003)


10. Reliance Monthly Income Plan (December 2003)
11. Reliance Diversified Power Sector Fund (March 2004)
12. Reliance Pharma Fund ( May 2004)
13. Reliance Floating Rate Fund (August 2004)
14. Reliance Media & Entertainment Fund (September 2004)
15. Reliance NRI Equity Fund (October 2004)
16. Reliance NRI Income Fund (October 2004)
17. Reliance Index Fund (January 2005)
18. Reliance Equity Opportunities Fund (February 2005)
19. Reliance Fixed Maturity Fund - Series I (March 2005)
20. Reliance Fixed Maturity Fund - Series II (April 2005)
21. Reliance Regular Saving Fund (May 2005)
22. Reliance Liquidity Fund (June 2005)
23. Reliance Tax Saver (ELSS) Fund (July 2005)
24. Reliance Fixed Tenor Fund (November 2005)
25. Reliance Equity Fund (Feb 2006)
26. Reliance Long Term Equity Fund (Dec 2006)
27. Reliance Equity Advantage Fund (July 2007).
RCAM has been registered as portfolio managers vide SEBI Registration No.
INP000000423 and renewed effective 1st August, 2003.
RCAM has commenced these activities. It has been ensured that key personnel of
the AMC, the systems, back office, bank and securities accounts are segregated

34

activity wise and there exists systems to prohibit access to inside information of
various activities. As per SEBI Regulations, it will further ensure that AMC meets
the capital adequacy requirements, if any, separately for each such activity.
RCAM has been appointed as the Investment Manager of "Reliance India Power
Fund", a Venture Capital Fund registered with SEBI vide Registration
no.IN/VCF/05-06/062 dated June 16, 2005 but this activity is yet to commence.

Reliance Mutual Fund


Reliance Mutual Fund (RMF) has been established as a trust under the Indian
Trusts Act, 1882 with Reliance Capital Limited (RCL), as the Settler/Sponsor and
Reliance

Capital

Trustee

Co.

Limited

(RCTCL),

as

the

Trustee.

RMF has been registered with the Securities & Exchange Board of India (SEBI)
vide registration number MF/022/95/1 dated June 30, 1995. The name of Reliance
Capital Mutual Fund has been changed to Reliance Mutual Fund effective 11th.
March 2004 vide SEBI's letter no. IMD/PSP/4958/2004 date 11th. March 2004.
Reliance Mutual Fund was formed to launch 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.

The main objectives of the Trust are:

35

To carry on the activity of a Mutual Fund as may be permitted at law and


formulate and devise various collective Schemes of savings and investments for
people in India and abroad and also ensure liquidity of investments for the Unit
holders;

To deploy Funds thus raised so as to help the Unit holders earn reasonable returns
on their savings and

To take such steps as may be necessary from time to time to realize the effects
without any limitation.

Sponsor
Reliance Capital Asset Management Ltd. is a wholly owned subsidiary of
Reliance Capital Limited, the sponsor. The entire paid-up capital (100%) of
Reliance Capital Asset Management Ltd is held by Reliance Capital Ltd.

Reliance Mutual Fund (RMF) has been sponsored by Reliance Capital Ltd (RCL).
Reliance Capital is Indias fastest growing private sector financial services
company. Ranking among the top 3 private sector banking and finance companies
in India, with a shareholder base of over 1.3 million. Reliance Capital has
interests in asset management and mutual funds, life and general insurance,
private equity and proprietary investments, stock broking and other financial
services with a net worth in excess of Rs. 5,262 crore (as of March 31, 2007)

36

Particulars
(Rs.in crores)

2005-06

2004-05

2003-04

2002-03

Total Income

652.02

295.69

356.79

458.78

Profit Before Tax

550.61

111.21

105.79

102.63

Profit After Tax

537.61

105.81

105.79

102.63

Reserves & Surplus

3849.58

1310.08

1271.84

1208.5

Net Worth

4122.46

1437.92

1399.81

1336.33

Earnings per Share


(Rs.)

29.74
(Basic +
Diluted)

8.31
(Basic +
Diluted)

8.31
(Basic +
Diluted)

8.06
(Basic +
Diluted)

112.95

112.95

109.96

104.54

30%

30%

29%

29%

223.40

127.84

127.84

127.83

Book Value per Share


(Rs.)
Dividend (%)
Paid up Equity Capital

Reliance Capital Ltd. has contributed Rupees One Lac as the initial contribution
to the corpus for the setting up of the Mutual Fund. Reliance Capital Ltd. is
responsible for discharging its functions and responsibilities towards the Fund in
accordance with the Securities and Exchange Board of India (SEBI) Regulations.
The Sponsor is not responsible or liable for any loss resulting from the operation
of the Scheme beyond the contribution of an amount of Rupees one Lac made by
them towards the initial corpus for setting up the Fund and such other accretions
and additions to the corpus.

Corporate Governance Policy:


Reliance Capital Asset Management Ltd. has a vision of being a leading player in
the Mutual Fund business and has achieved significant success and visibility in
the market. However, an imperative part of growth and visibility is adherence to

37

Good Conduct in the marketplace. At Reliance Capital Asset Management Ltd.,


the implementation and observance of ethical processes and policies has helped us
in standing up to the scrutiny of our domestic and international investors.
Management
The management at Reliance Capital Asset Management Ltd. is committed to
good

Corporate

Governance,

which

includes

transparency and

timely

dissemination of information to its investors and unit holders. The Reliance


Capital Asset Management Limited Board is a professional body, including wellexperienced and knowledgeable Independent Directors. Regular Audit Committee
meetings are conducted to review the operations and performance of the company.
Employees
Reliance Capital Asset Management Ltd. has a preset code of conduct for all its
officers. It has a clearly defined prohibition on insider trading policy and
regulations. The management believes in the principles of propriety and utmost
care is taken while handling public money, making proper and adequate
disclosures.
All personnel at Reliance Capital Asset Management Ltd. are made aware of the
dos and donts as part of the Dealing policy laid down by the Securities and
Exchange Board of India (SEBI). They are taken through a well-designed HR
program, conducted to impart work ethics, the Code of Conduct, information
security, Internet

and

e-mail

usage

and

host

of

other

issues.

One of the core objectives of Reliance Capital Asset Management Ltd. is to


identify issues considered sensitive by global corporate standards, and implement

38

policies/guidelines in conformity with the best practices as an ongoing process.


Reliance Capital Asset Management Ltd. gives top priority to compliance in true
letter and spirit, fully understanding its fiduciary responsibilities.

The Custodian.
Deutsche Bank, AG
The Trustee has appointed Deutsche Bank, AG located at Kodak House, Ground
Floor, 222 Dr. D.N.Road, Mumbai-400 001, as the Custodian of the securities that
are bought and sold under the Scheme. A Custody Agreement has been entered
with Deutsche Bank in accordance with SEBI Regulations. The Custodian is
approved by SEBI under registration no. IN/CUS/003 to act as Custodian for the
Fund.
Deutsche Bank AG, the Custodian shall, inter alias:

Provide post-trading and custodial services to the Mutual Fund.

Keep Securities and other instruments belonging to the Scheme in safe custody.

Ensure smooth inflow/outflow of securities and such other instruments as and


when necessary, in the best interests of the unit holders.

Ensure that the benefits due to the holdings of the Mutual Fund are recovered and

Be responsible for loss of or damage to the securities due to negligence on its part
on the part of its approved agents.

39

The Registrar
Reliance Capital Asset Management Limited has appointed M/s. Karvy
Computershare Pvt. Limited to act as the Registrar and Transfer Agent to the
Schemes of Reliance Mutual Fund. Reliance Capital Asset Management Ltd. and
the Trustee have satisfied themselves, after undertaking appropriate due diligence
measures, that they can provide the services required and have adequate facilities,
including systems facilities and back up, to do so. The Trustee has also laid down
broad parameters for supervision of the Registrar. As Registrar to the Schemes,
KCL will accept and process investor's applications, handle communications with
investors, perform data entry services, dispatch Account Statements and also
perform such other functions as agreed, on an ongoing basis. The Registrar is
responsible for carrying out diligently the functions of a Registrar and Transfer
Agent and will be paid fees as set out in the agreement entered into with it and as
per any modification made thereof from time to time.

Trustees
Reliance Capital Trustee Co. Limited (RCTC), a company incorporated under the
Companies Act, 1956, has been appointed as the Trustee to the Fund vide the
Trust Deed dated April 25, 1995 executed between the Sponsor and the Trustee.

40

Management Team

Board of Directors

1.

Amitabh Chaturdevi

2.

Kanu Doshi

3.

Manu Chadha

4.

Sushil Tripathi

Management Team
President Vikrant Gugnani
Chief Investment Officer K.Rajagopal
Head Equity Investments Madhusudan Kela

Equity Fund Managers

1.

Sunil B Singhania

2.

Ashwani Kumar

3.

Shailesh Raj Bhan

Debt Fund Managers

1.

Amitabh Mohanty

2.

Amit Tripathi

41

3.

Prishant Pimple

Head of Departments

Brand and Communication

Abraham Alapatt

Finance and Accounts

Amit Bapna

Human Resource

Rajesh Derhgawen

Development
Information Technology

Vinay Nigudkar

Legal & Compliance

Balkrishna Kini

Risk Management

Lav Chaturvedi

Operations & Settlement

Geeta Chandran

Infrastructure &

Pradeep Andrade

Administration
R&T operations

Prashanth D Pereira

Sales and Distribution

Sundeep Sikka

Zonal Heads
Northern Zone Head

Aashwin Dugal

Western Zone Head

Devendra Daga

Southern Zone Head

Gurbir Chopra

Branches

42

REGISTERED
OFFICE

Reliance Capital Asset Management


Limited
Reliance House,
Nr. Mardia Plaza,
Off. C.G. Road,
Ahmedabad 380 006

CORPORATE OFFICE

Reliance Capital Asset Management


Limited
Express Building,
4th & 6th Floor, 14-'E' - Road,
Above Satkar Hotel,
Opp. Churchgate Station,
Churchgate, Mumbai 400 020.
Tel No.: +91 22 3041 4800.
Fax No.:+91 22 3041 4818 / 3041 4899.
Email : customer_care@reliancemutual.com

Service Providers
Registrar to the schemes of Reliance Capital Asset
Management:
Karvy Computershare Pvt. Ltd
Custodians to the schemes of Reliance Capital Asset
Management
Deutsche Bank AG
Web Services
Reliance Infocomm

43

Bankers to the Schemes of Reliance Capital Asset


Management

HDFC Bank Limited

ICICI Bank Limited

ABN Amro Bank

Citibank N.A.

Standard Chartered Bank

Deutsche Bank AG

HSBC Bank

UTI Bank

IDBI Bank

ING Vysya Bank

44

RESEARCH
METHODOLOGY

45

RESEARCH PROBLEM
The purpose of my project is to analyse the advantages of mutual funds over
equity. However objectives of my study are as follows:

RESEARCH OBJECTIVES
To study the differences between investment in equities and mutual funds.
To check whether it is possible to reduce risk by investing in mutual funds.
To study comparative returns of equities and mutual funds
To study various equity diversified schemes of reliance mutual funds
To rate mutual funds on the basis of their performance.
To establish relationship of equity diversified schemes with Sensex.

SOURCES OF DATA
In order to achieve the various stated objectives secondary data available on the
subject was used and other necessary information has been collected from the
Reliance Mutual Fund Chandigarh and other Mutual Fund Houses, newspapers,
journals, magazines etc.
TOOLS APPLIED
Data collected from various secondary sources was used for comparing the
Mutual fund scheme using Standard Deviation, Beta, Correlation and Sharpe
Ratio measures of risk and performance of mutual funds.

46

STANDARD DEVIATION

Standard deviation is a measure of the dispersion of a set of data from its mean.
The more spread apart the data is, the higher the deviation. Here, standard
deviation is applied to the annual rate of return of an investment to measure the
investment's volatility (risk). A volatile stock would have a high standard
deviation. In mutual funds, the standard deviation tells us how much the return on
the fund is deviating from the expected returns.
A security that is volatile is also considered higher risk because its performance
may change quickly in either direction at any moment.
A fund that has a consistent four-year return of 3%, for example, would have a
mean, or average, of 3%. The Standard Deviations for this fund would then be
zero because the funds return in any given year odes not differ formats four-tear
mean of 3%. On the other hand, a fund that in each of the last four years returned5%, 17%,2% and 30% will have mean return of 11%.The fund Will also exhibit a
high standard deviation because each year the return of the fund differs from the
mean return This fund is therefore more risky because it fluctuates widely
between negative and positive returns within a short period.
BETA
Beta is a fairly commonly used measure of risk. It basically indicates the level of
volatility associated with the fund as compared to the benchmark.

47

So quite naturally the success of beta is heavily dependent on correlation between


a fund and its benchmark. Thus if the funds portfolio doesnt have a relation
benchmark index then a beta would be grossly inadequate.
A beta that is greater than one means that the fund is more volatile than the
benchmark, while a beta of less than one means that the fund is less volatile than
the index. A fund with a beta very close to 1 means the funds performance
closely matches the index or benchmark.
If, for example, a fund has a beta of 1.03 in relation to the BSE sensex, the fund
has been moving 3% more than the index. Therefore, if the BSE Sensex increased
10% the fund would be expected to increase 10.30%.
Investors expecting the market to be bullish may choose funds exhibiting high
betas, which increase investors chances of beating the market. If the investor
expects the market to be bearish in the near future, the funds that have betas less
than 1 are a good choice because they would be expected to decline less in value
than the index.
SHARPE RATIO
Sharpe Ratio = Fund return in excess of risk free return/ Standard Deviation of
fund.
The Sharpe ratio tells us whether the returns of a portfolio are due to smart
investment decisions or a result of excess risk. This measurement is very useful
because although one portfolio or fund can reap higher returns than its peers, it is
only a good investment if those higher returns do not come with too much

48

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

CORRELATION
Correlation = co-variance of X and Y/number of variations (standard deviation
of X series)(standard deviation of Y series)
Correlation is a statistical technique that measures and describes a relationship
between two variables. The measure of correlation is called correlation index or
correlation coefficient. It gives one figure which shows the degree and direction
of correlation. It means the coefficient of correlation helps us in determining the
closeness of relationship between two or more variables.

49

ANALYSIS

50

Equity investment generally refers to the buying and holding of shares of stock
on a stock market by individuals and funds in anticipation of income from
dividends and capital gain as the value of the stock rises. It also sometimes refers
to the acquisition of equity (ownership) participation in a private (unlisted)
company.
The equities held by private individuals are often held via mutual funds or other
forms of pooled investment vehicle, many of which have quoted prices that are
listed in financial newspapers or magazines; the mutual funds are typically
managed by prominent fund management firms or fund managers. Such holdings
allow individual investors to obtain the diversification of the fund(s) and to obtain
the skill of the professional fund managers in charge of the fund(s).

Analysis

Portfolio Diversification

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


your risk is spread out. The idea behind diversification is to invest in a large
number of assets so that a loss in any particular investment is minimized by gains

51

in others. In other words, the more stocks and bonds you own, the less any one of
them can hurt you. Large mutual funds typically own hundreds of different stocks
in many different industries.

Example:
Portfolio of reliance growth fund as on June30, 2007
TABLE 1 - PORTFOLIO DIVERSIFICATON
Holdings
Equities
Jindal Saw Ltd
Divis Laboratories Ltd
JSW Steel Ltd
Reliance Industries Ltd
Bharat Earth Movers Ltd
Gujrat Mineral

Weightage
88.12
4.23
4.22
3.88
3.36
3.26
2.35

Development
Corp Ltd
Jaiprakash Assssociates

2.28

Ltd
Northgate Technologies

2.14

Ltd
Lupin Ltd
Reliance Communications

2.13
1.98

Ltd
State Bank of India
Jain Irrigation Systems Ltd
Gujrat State Fertilizers &

1.94
1.91
1.83

Chemicals Ltd
Cambridge Solutions Ltd
Jindal Steel & Power Ltd
Adani Enterprises Ltd
Maruti Udyog Ltd
Bank of Baroda
HCL Technologies Ltd
AIA Engineering Ltd
Bombay Dyeing &

1.79
1.76
1.76
1.76
1.72
1.58
1.57
1.54

Manufacturing Co Ltd
52

Crompton Greaves Ltd


Dena Bank
Maharashtra Seamless Ltd
Escorts Ltd
Strides Arcolab Ltd
Bharati Shipyard Ltd
Greaves Ltd
NIIT Technologies Ltd
Tata Motors Ltd
Orient Paper & Industries

1.54
1.51
1.49
1.43
1.42
1.36
1.32
1.32
1.31
1.24

Ltd
Radico Khaitan Ltd
United Phosphorus Ltd
NDTV Ltd
BPCL
Oswal Chemicals &

1.16
1.15
1.06
1.04
1.03

Fertilizers Ltd
Gammon India Ltd
Shiv-Vani Oil & Gas

1.03
1.03

Exploration Services Ltd


Equity with less than 1%

17.70

corpus
Derivatives, Cash &

11.88

Other Receivables

Grand Total

100

Professional management
To try to identify good shares to invest in, two main schools of thought exist:
technical analysis and fundamental analysis. The former involves the study of the
price history of a share(s) and the price history of the stock market as a whole;

53

technical analysts have developed an array of indicators, some very complex, that
seek to tease useful information from the price and volume series. Fundamental
analysis involves study of all pertinent information relevant to the stock and
market in question in an attempt to forecast future business and financial
developments including the likely trajectory of the share price(s) itself. The
fundamental information studied will include the annual report and accounts,
industry data (such as sales and order trends) and study of the financial and
economic environment (e.g. the trend of interest rates).
Most of us have neither the skill to find good stocks that suit our risk and returns
profile nor the time to track our investmentsbut still want the returns that can be
had from equities. Thats where mutual funds come in.
When you invest in mutual funds, it is your fund manager who will take care of
your investments. A fund manager is an investment specialist, who brings to the
table an in-depth understanding of the financial markets. By virtue of being in the
market, the fund manager is ideally placed to research various investment options,
and invest accordingly for you.

54

Amit Tripathi
Debt Fund Manager
B.Com.(Hons), PGDM has over 6 years
experience in Financial Services. At the age
of twenty-eight he is one of the youngest
debt Fund Manager at Reliance Capital Asset
Management Ltd.
From 1999 to 2003 he served at the New
India Assurance Co. Ltd as an admin officer
in the Investment Dept. Also featuring in his
profile are stints with Sun Invest Associates
Ltd as an Analyst for Equity Market
Operations and CFS Financial Services P.
Ltd as an Equity Dealer.

Ashwani Kumar
Equity Fund Manager
B.Sc., MBA - Finance, has over 10 years of
experience in this industry. At Reliance Capital
Asset Management Ltd. he is an Equity Fund
Manager.
Among his past learning is a long stretch with
Zurich Asset Management Co. India P. Ltd.
where he was the Senior Research Analyst,
responsible for tracking automotive, metals, and
engineering sectors.

55

Diversification of risk
An investor in a mutual fund acquires a diversified portfolio, no matter how small
his investment is. Diversification reduces the risk of loss, as compared to
investing directly in one or two shares or debentures or other instruments. When
an investor invests directly, all the risk of potential loss is his own. While
investing in the pool of funds with other investors, any loss on one or two
securities is also shared with other investors. This risk reduction is one of the
most important benefits of a collective investment vehicle.
Example:
Taking the beta values of 10 stocks from portfolio of reliance vision fund and
comparing it with beta value of fund. The Beta factor describes the movement in a
stock's or a portfolio's returns in relation to that of the market return.
TABLE 2: BETA
Stocks
ITC Ltd
Infosys Technologies Ltd
Grasim Industries Ltd

Beta
.66
.84
.86

56

Reliance Vision Fund


Tata Consultancy Services Ltd
Maruti Udyog Ltd
Reliance Industries Ltd
HDFC Bank
Tata Motors Ltd
Larsen & Tourbo Ltd
Reliance Communications Ltd

.90
.95
.98
1.00
1.09
1.15
1.20
1.35

1.4
1.2

IT C Ltd

Infosys T echnologies Ltd

Grasim Industries Ltd

Relianc e Vision Fund

T ata Consultanc y Servic es Ltd

Maruti Udyog Ltd

Relianc e Industries Ltd

HDFC Bank

Tata Motors Ltd

Larsen & T ourbo Ltd

Relianc e Communic ations Ltd

1
0.8
0.6
0.4
0.2
0
Beta
GRAPH 4: BETA
So we can see that beta of 7 stocks is more than that of Reliance Vision Fund.

Small investments
A mutual fund, gives you an ownership of the same investment pie at an outlay
of Rs 1,00-5,000. Thats because a mutual fund pools the monies of several
investors, and invests the resultant large sum in a number of securities. So, on a
small outlay, you get to participate in the investment prospects of a number of
securities.

57

Example stated below shows that to buy even one share of complete portfolio of
reliance vision fund will involve investment of Rs. 31146.62 (according to market
price on 30th july) and if a person invests through mutual funds he can take
advantage of all the stocks by investing just Rs.5,000.

TABLE 3: MARKET PRICES OF EQUITY STOCKS

Equity stocks

Market price as

Divis Laboratories Ltd


Larsen & Toubro Ltd
Reliance Industries Ltd
Infosys Technologies Ltd
Alstom Projects Ltd
Reliance

on 30thjuly 2007
6831.2
2445.65
1847.85
1978.85
748.95
540.7

Communications Ltd
Siemens Ltd
HDFC Bank Ltd
Jaiprakash Associates
Grasim Industries Ltd
Tata Consultancy

1262.3
1159.8
811.6
2946.85
1137.57

services Ltd
Television Eighteen India
Maruti Udyog Ltd
Indian Hotels Co Ltd
Cummins India Ltd
Tata Motors Ltd
Network Eighteen Fincap

821.2
847.35
139.6
371.5
707.2
445.35

Ltd
Automotive Axles ltd
State Bank Of India
HPCL
Gujarat StateFertilizers &

477.15
1579
256.35
224.15

Chemicals Ltd
Tata Tea Ltd

770

58

ITC Ltd
Bharat Forge Ltd
Apollo Tyres Ltd
Ambuja Cements Ltd
Reliance Energy Ltd
Deccan Aviation Ltd

Grand total

167.3
282.75
374.95
1022.6
780.25
168.6
31146.62

Return Potential
Mutual Funds have the potential to provide a higher return as they invest in a
diversified basket of selected securities.
TABLE 4: ONE YEAR RETURN
Stocks
Infosys Technologies Ltd
Larsen & Tourbo Ltd
Reliance Industries Ltd
Reliance Communications
Tata Consultancy Services
Grasim Industries Ltd
Maruti Udyog Ltd
Tata Motors Ltd
HDFC Bank
ITC Ltd
Sensex
Reliance Vision Fund

1 Year Return
19.55
135.78
93.29
112.67
23.77
42.43
7.20
-5.47
50.76
1.91
44.74
33.67

59

140
120
Infosys Tec hnologies Ltd

Larsen & Tourbo Ltd

Relianc e Industries Ltd

Relianc e Communic ations Ltd

Grasim Industries Ltd

Maruti Udyog Ltd

T ata Motors Ltd

ITC Ltd

Sensex

Relianc e Vision Fund

100
80
60

Tata Consultanc y Servic es Ltd

40
20
HDFC Bank

0
-20

1 Year Return (%)


GRAPH 5: ONE YEAR RETURN %

Here return of 5 stocks is less than Reliance Vision Funds return. While
other 5 stocks and Sensex returns are higher than funds return.

Example: Performance of reliance growth fund (data as on 30t h march 2007)

60

TABLE 5: SCHEME RETURN V/S BENCHMARK RETURN


Period

Schemes

Benchmark Return

Return

(BSE 100)

Last 1 year

14.11

11.70

Last 3 year

51.81

30.91

Last 5 year

60.72

30.81

Returns Since

32.79

12.88

Inception

70
60
50 Last 1 year

Last 3 year

Last 5 year

40
30
20 Returns Since Inception
10
0
Schemes Return Benchmark Return (BSE 100)
GRAPH 6: SCHEME RETURN V/S BENCHMARK
RETURN

Here we have compared Reliance Growth Funds return with its


benchmark that is BSE 100. We can see that funds return is more than that of
its benchmark.

61

Transaction Cost
Mutual Funds are a relatively less expensive way to invest compared to directly
investing in the capital markets because the benefits of scale in brokerage,
custodial and other fees translate into lower costs for investors.
While investing in Mutual funds investor has to pay the entry load which is
generally found to be 2.25%.
Entry Load: Example
If the entry load (sales load) for a scheme is 2.25% and the NAV of the scheme is
Rs. 10.00, the investor who wants to buy the units will not be able to buy at Rs.
10.00. He will pay:
= 10.00 + (10.00*2.25/100) = 10.00 + 0.225 = 10.225
When an investor withdraws his investment he has to pay variable exit load,
charged depending on duration of stay in the fund. This is generally:
Within 6 months: 1%
6 months 1 year: .5%
After 1 year: NIL
Exit Load: Example
If a fund imposes an exit load of 1.25%, the investor who repurchases his units,
will get a price that is:
= 10.00 (10.00*1.25/100)=10.00-0.125 = 9.875

62

Investing directly in stocks involves following initial expenses:

TABLE 6: INITIAL EXPENSES OF INVESTING IN STOCKS


Parameters

Offline

Online

Account opening

Rs.436

Rs. 750

Not

Rs. 750

charges
Software

provided
AMC

Rs.299

Rs.299

P.A.

P.A.

Note: Expenses as per Anandrathi Securities Ltd.

Variable expense that is brokerage

TABLE 7: BROKERAGE ON DIFFERENT EQUITY INVESTMENTS


Delivery

0.30

Intraday

0.03

F&O

0.03

* Service Tax of 12.36% is also levied on brokerage which is borne by the


investor.

63

Taxation

In mutual funds investor can save tax under Section 80C which allows a
limit of Rs.1, 10,000 which is deducted from taxable income of investor. This can
be done by investing in Equity Linked Saving Schemes (ELSS).
Through investment in equity stocks investor cannot get redemption under
Section 80C.

Short term capital gain and long term capital gain are charged in the same
manner in equity stock and mutual funds.
TABLE 8: Long Term Capital Gain
Equity schemes
Debt schemes

NIL
Without

11.33%

indexation
With indexation

22.66%

TABLE 9: Short Term Capital Gain


Equity schemes

11.33%

Debt schemes

33.99%

64

At the time of withdrawal

Security Transaction tax (STT) is charged at .25% in mutual funds


In equity stocks taxes are as follows
TABLE 10: TAXES ON EQUITY AT TIME OF WITHDRAWAL
Taxes

Deliver

Intraday

F&O

y
STT

.125

.0125

.017

Stamp

.01

.002

.002

Duty

Withdrawing from investment


When in mutual funds an investor withdraws his investment from open-end
schemes, he gets the money back promptly at net asset value related prices from
the Mutual Fund.
Example: An investor wants to redeem 500 units from his total investment done in
Reliance Growth fund and he applies for redemption on 03/08/2007. NAV on this
date is Rs. 316.56.no Exit load is to be charged as he is making redemption after 1
year.

65

So he will get amount worth


500 * 316.56 = 158280 395.7 = Rs. 157884.3
(* 395.7 is Security Transaction tax (STT) which is .25 %.)
In closed-end schemes, the units can be sold on a stock exchange at the
prevailing market price or the investor can avail of the facility of direct
repurchase at NAV related prices by the Mutual Fund.
While withdrawing from equity share at any given moment, its price is strictly a
result of supply and demand. The supply is the number of shares offered for sale
at any one moment. The demand is the number of shares investors wish to buy at
exactly that same time. The price of the stock moves in order to achieve and
maintain equilibrium.
When buyers outnumber sellers, the price rises. Eventually sellers enter, and/or
buyers leave, achieving equilibrium between buyers and sellers. When sellers
outnumber buyers, the price falls. Eventually buyers enter, and/or sellers leave,
again achieving equilibrium.
Thus, what a share of a company at any given moment is determined by all
investors voting with their money. If more investors want a stock and are willing
to pay more, the price will go up. If more investors are selling a stock and there
aren't enough buyers, the price will go down.

66

Flexibility
Mutual funds offer features such as regular investment plans, regular withdrawal
plans and dividend reinvestment plans; you can systematically invest or withdraw
funds according to your needs and convenience
Systematic Investment Plan (SIP): Here an investor invests certain amount
monthly or quarterly or half yearly in a particular scheme. For doing this investor
can avail the facility of auto debit.
Example: A person has to invest Rs.12000 through SIP in some fund. Then he has
following options
TABLE 11: Systematic Investment
Rupees
Months
Amount
Time
* 100
60
6,000
1,000
12
12,000
Monthly
3,000
4
12,000
Quarterly
6,000
2
12,000
Half yearly
*Minimum investment in any fund through SIP is Rs.6000.
Systematic Withdrawal Plan (SWP): In this investor tells that he needs some fixed
amount of money per month. Then he will be paid this amount out of his capital
and return earned and rest of his money will remain invested.
Dividend Reinvestment: Allows the investor to reinvest amount of dividends or
other distributions made back into the same fund and receive additional units.

67

Choice of Schemes
Mutual Funds offer a family of schemes to suit your varying needs over a
lifetime. Example: Reliance offers
Equity funds

Reliance Growth Fund

Reliance Vision Fund

Reliance Equity Fund

Reliance Index Fund

Reliance Tax Saver (ELSS) Fund etc

Debt Funds

Reliance Liquidity Fund

Reliance Income Fund

Reliance Medium Term Funds etc

Balanced funds are also offered

68

Reliance Regular Saving Fund is available in all the three options

Equity option

Balanced option

Debt option

ANALYSIS OF RELIANCE EQUITY DIVERSIFIED


FUNDS
In these funds except for a small portion of investment in liquid money market,
diversified equity funds invest mainly in equities without any concentration on a
particular sector(s). These funds are well diversified and reduce sector-specific or
company-specific risk. However, like all other funds diversified equity funds too
are exposed to equity market risk.
DIVERSIFICATION
Diversification means making investments in different sectors. Investments in
securities are spread across a wide cross-section of industries and sectors and thus
risk is reduced.
Diversification reduces the risk because all stock may move in same direction in
the same proportion at the same time
WHO SHOULD INVEST

69

This is an ideal category for those who want to participate in stock market &
knows the risk involved in stock market but have few rupees to invest in blue chip
stocks.
HOW THEY PERFORMED
Though the short term out look is volatile in long-term equity diversified funds
have outperformed other categories & stock markets will lesser amount of risk
than stock markets. The average returns of equity diversified funds are 102%.

RELIANCE EQUITY DIVERSIFIED SCHEMES


Reliance offers 6 equity diversified schemes. These are:
1.

Reliance Equity Fund (REF)

2.

Reliance Equity Opportunities Fund (REOF)

3.

Reliance Growth Fund (RGF)

4.

Reliance NRI equity fund (RNEF)

5.

Reliance Regular Saving Fund (RRSF)

6.

Reliance Vision Fund (RVF)

70

Reliance Equity Fund


NAV as on 24/8/07: 12.39
Corpus Amount as on 30/07/07: 3493.68 crores
Fund Objective: The scheme aims to generate capital appreciation and provide
long-term growth opportunities by investing in equity & equity related securities
of top 100 companies by market capitalization.
Inception Date: October 1995
Benchmark: S & P CNX Nifty
Stated Asset Allocation:
Equity: 75 100%
Debt: 0 25%
Others: 0 25%
Fund Style:

71

Fund Manager (since Feb 2006): Sunil.B.Singhania


Returns:
Time
1 year
Since Launch

Fund
22.07
15.74

Category
27.02
N.A

Reliance Equity Opportunities Fund


NAV as on 24/8/07: 21.8565
Corpus Amount as on 30/07/07: 2616.63 crores
Fund Objective: The scheme aims to invest in stocks across those sectors and
industries where Indias strong inherent potential is increasingly becoming visible
to the world, which are driving our economy and whose fundamental future
growth is influenced by ongoing economic reforms, FDI inflows and
infrastructural changes.
Inception Date: March 2005
Benchmark: BSE 100
Stated Asset Allocation:
Equity: 75 100%
Debt & others: 0 25%
Fund Style:

72

Fund Manager (since March 2005): Sailesh Raj Bhan


Returns:
Time
1 year
Since Launch

Fund
27.02
37.32

Category
27.02
N.A

Reliance Growth Fund


NAV as on 24/8/07: 293.09
Corpus Amount as on 30/07/07: 4082.03 crores
Fund Objective: The scheme aims at long term growth of capital through
research based investment approach. The funds will be invested in Equity and
equity related instruments, and there will be an exposure to debt and money
market instruments also.
Inception Date: October 1995
Benchmark: BSE 100
Stated Asset Allocation:
Equity: 65 100%
Debt & others: 0 35%
Fund Style:

73

Fund Manager (since Jan 2004): Sunil.B.Singhania


Returns:
Time
1 year
Since Launch

Fund
34.96
32.86

Category
27.02
N.A

Reliance NRI Equity Fund


NAV as on 24/8/07: 26.7379
Corpus Amount as on 30/07/07: 154.88 crores
Fund Objective: The scheme aims to generate optimal returns by investing in
equity & equity related instruments of Indian companies primarily drawn from
BSE 200.
Inception Date: November 2004
Benchmark: BSE 200
Stated Asset Allocation:
Equity: 65 100%
Debt: 0 35%
Others: 0 35%
Fund Style:

74

Fund Manager (since October 2004): Ashwani Kumar


Returns:
Time
1 year
Since Launch

Fund
29.31
41.89

Category
27.02
N.A

Reliance Regular Saving Equity Fund


NAV as on 24/8/07: 16.4962
Corpus Amount as on 30/07/07: 235.41 crores
Fund Objective: The scheme aims to generate consistent returns by actively
investing in equity or equity related securities. It will invest at least 80 per cent of
its assets in equity and equity related securities. Up to 20 per cent of its assets will
be invested in debt and money market instruments with an average maturity of 5
to10 years.
Inception Date: May 2005
Benchmark: BSE 100
Stated Asset Allocation:
Equity: 80 100%
Debt & others: 0 20%
Fund Style:

75

Fund Manager (since June 2005): Ashwani Kumar


Returns:
Time
1 year
Since Launch

Fund
26.97
24.43

Category
27.02
N.A

Reliance Vision Fund


NAV as on 24/8/07: 201.15
Corpus Amount as on 30/07/07: 3319.29 crores
Fund Objective: The fund seeks capital appreciation by investing in larger stocks
with good fundamentals and good long-term prospects.
Inception Date: October 1995
Benchmark: BSE 100
Stated Asset Allocation:
Equity: 60 100%
Debt: 0 30%
Others: 0 10%
Fund Style:

76

Fund Manager (since June 2004): Ashwani Kumar


Returns:
Time
1 year
Since Launch

Fund
33.67
28.72

Category
27.02
N.A

TREND ANALYSIS

TABLE 12: TREND ANALYSIS


Schemes
Sensex
REF
REOF
RRSF
RNEF
RVF
RGF

7/2/2007
100
100
100
100
100
100
100

7/3/2007
100.82
100.77
100.74
100.43
100.96
100.49
101.05

7/4/2007
101.80
100.46
101.11
101.12
101.8
101.12
101.45

7/5/2007
102.31
100.077
100.73
100.28
100.87
100.93
100.83

7/6/2007
102.18
100.85
101.79
101.26
101.91
101.64
101.53

7/9/2007
103.16
101.55
102.03
102.42
102.56
102.85
102.66

7/11/2007 7/12/2007 7/13/2007 7/16/2007 7/17/2007 7/18/2007


7/20/07
7/25/07105.13
7/26/07 105.27
7/27/07 105.12
7/30/07
103.20 7/23/07
102.52 7/24/07
103.76
106.91
107.35
108.17
108.03
107.94
108.47
105.26
101.86
102.64
102.95
103.49
102.95
102.27
103.57
104.04 102.67
101.01 102.18
102.25
101.85 103.96
102.97 103.57
103.47103.34103.44
102.86
102.69 103.82
99.78
99.92
102.83 103.52
104.81 102.86
104.78102.25104.91
103.2
104.53
105.53
104.77
104.42
105.49
101.27
101.56
102.01
103.65
104.9
105.27
105.51
104.99
106.62
107.86 103.97
103.72 104.06
104.41
102.09 107.81
103.9 111.64
104.3107.31104.72
105.55
106.07
106.09
104.86
105.62
103.07
103.26
102.92
104.2
104.77
105.6
104.87
104.93
106.07
109.61
106.27
105.18
105.8
102.95
103.34

7/10/2007
103.45
101.32
101.99
102.24
102.07
102.28
102.58

7/19/2007
7/31/07
105.20
104.93
103.73
103.65
103.23
101.73
104.92
104.28
106.17
106.5
105.53
104.85
106.16
104.8

77

115

110

105
trends
sensex100

REF

REOF

RRSF

RNEF

RVF

RGF

95

90
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Days

GRAPH 7: TREND ANALYSIS


78

The trend analysis shows that all the schemes show an upward trend with rise in
market and a downward trend with fall in market. This clearly shows that even
mutual funds are prone to market risk.

CORRELATION
On the basis of table no.

we have calculated correlation of various funds with

Sensex which are:


TABLE 13: CORRELATION
Schemes
REOF
RRSF
REF
RGF
RVF
RNEF

correlation
.224266
.571238
.667015
.719482
.79285
.826361

79

GRAPH 8: CORRELATION

Reliance NRI Equity Fund has the highest correlation. This means this fund is
more prone to market risk while Reliance Equity Opportunities Fund is least
prone to market risk.

SHARPE RATIO
Sharpe Ratio = Fund return in excess of risk free return/ Standard Deviation of
fund.
The Sharpe ratio tells us whether the returns of a portfolio are due to smart
investment decisions or a result of excess risk. This measurement is very useful
because although one portfolio or fund can reap higher returns than its peers, it is
only a good investment if those higher returns do not come with too much
additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted
performance has been.
80

TABLE 8: SHARPE RATIO

Scheme
s
REF
REOF
RRSF
RNEF
RVF
RGF

Standard
2-Jul
12.86
23.4114
17.413
26.9792
209.09
309.27

31-Jul
13.33
23.8177
18.1594
28.7346
219.24
324.13

Deviation
0.17299
0.274625
0.320357
0.675785
3.951993
6.178211

Return
3.6547
1.7354
4.2864
6.5064
4.8926
4.8048

Risk

Risk

Free

Adjuste

Sharpe

Return
0.005
0.005
0.005
0.005
0.005
0.005

d Return
3.6497
1.7304
4.2814
6.5014
4.8876
4.7998

Ratio
21.0977
6.3009
13.3647
9.6205
1.2367
0.7768

bank rate (risk free return) 6%

GRAPH 9: SHARPE RATIO

Reliance equity fund is having the highest Sharpe ratio. So it is the best fund
while reliance growth fund has the lowest Sharpe ratio.
81

CONCLUSION
82

Conclusion
Mutual funds have market risk to some extent but they help in covering
company risk.
Just like shares, mutual funds do not offer assured returns and protection of
capital and carry risk. For instance, unlike bank deposits, your investment in a
mutual fund can fall in value. In addition, mutual funds are not insured or
guaranteed by any government body.
Risk diversification helps, if risk minimization is your objective. 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.

83

Example, Reliance appreciated 50%. A direct investment in the stock would


appreciate by 50 per cent. But your investment in the mutual fund, which had
invested 10 per cent of its corpus in Reliance, will see only a 5 % appreciation.
Investors 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. Institutional investors may feel that they cannot
make a portfolio suiting their investment objective.
Investors who have invested in open ended schemes always have a part of their
investment generally 10 15% in derivatives, cash and other receivables. This
reduces their returns to some extent.
Investor can monitor how a stock's price changes from hour to hour or even
second to second. By contrast, with a mutual fund, the price at which you
purchase or redeem shares will typically depend on the fund's NAV, which is
revealed only on daily basis.
Investors individually may lack sufficient funds to invest in high-grade stocks. A
mutual fund because of its large corpus allows even a small investor to take the
benefit of its investment strategy.
An investor generally has to take suggestion from financial advisors before
investing in stock market. And even for mutual funds an investor will have to take
advice of financial advisor as there are large numbers of mutual fund schemes.

84

Mutual funds offer regular investment plans, regular withdrawal plans and
dividend reinvestment plans; you can systematically invest or withdraw funds
according to your needs and convenience while in equities we have option of
intraday trading, delivery and derivatives.
If we consider various expenses and taxes, then mutual funds have higher
transaction cost.
Initial charges are their for making investments in equity stocks. While no such
charges are present in mutual funds.
While selling of equity stocks an investor may have to suffer loss, if buyers are
not their in market. In mutual funds redemption is done at NAV.

85

SUGGESTIONS AND
RECCOMENDATIONS

86

Recommendations
People who are ready to take high risk should go in for equity investments
while others should prefer mutual funds.
Looking at the inflation in India a person should understand that he will have to
enter the stock market directly or through mutual funds sooner or later.
More awareness among the people must be created about the mutual funds. There
should be better communication channels through which they can get to know
about different schemes and funds.
The people do not want to take risk. The AMC should launch more diversified
funds so that the risk minimizes. This will lure more and more people to invest in
mutual funds.
Entry load usually varies from 2 to 2.25%. Therefore, a few no load based funds
should be introduced. Thus, it would attract more and more customers for the
industry and lead to its expansion

87

BIBLIOGRAPHY
Search Engines:
www.google.com
Websites:
www.reliancemutual.com
www.mutualfundsindia.com
www.valueresearchonline.com
www.amfiindia.com
www.moneycontrol.com
www.nseindia.com
www.bseindia.com
www.reliancecapital.com
Magazine:
Author ICICI Bank, Investment Review, June 2007
Book:

Mutual funds management and working by Lalit K. Bansal.

88

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