“COMPARATIVE STUDY BETWEEN

MUTUAL FUNDS OFFER BY VARIOUS

COMPANIES IN INDIAN MARKET”

TABLE OF CONTENTS

Chapter - 1 Introduction…………………………….………….……………………6
Chapter – 2 Objective and Scope of Study
2.1 Objective…………………………………….………..…………………….8
2.2 Scope of the Study ……………………………….……..………………….8
Chapter – 3 Limitations………………..………………..………….………………....9
Chapter - 4 Theoretical Perspectives
4.1 Industry Profile……………………………………………...…..….……...10
4.2 Concept and Role of Mutual Fund………………………………..….…….12
4.3 Contribution of Various Players in Mutual Fund Market in India …….…..15

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 4.4 Organization and Management of Mutual Funds………….…..…….……..19
4.5 Investor’s profile…………………………………………..……………….25
4.6 Types of Mutual Funds………………………….………….………………30
4.7 Valuation of Mutual funds …………………………..…….……………….41
4.8 Mutual Fund Scheme Types………………………………..………………42
4.9 Different Modes of receiving the income earned from Mutual Fund
Investments…………………………………………..……..……………….44
4.10 Advantages of Investing through Mutual Funds……………………..……46
4.11 Evolution and Growth of Mutual Funds…………………………...………50
4.12 Recent Trends in Mutual Fund Industry……………………...………..…..55
4.13 Risk Factors of Mutual Fund……..……………………………………..…60
Chapter – 5 Methodology and Procedure of Work………………………………..64
Chapter – 6 Analysis of Data……………………………….…………...…………..67
Chapter – 7 Conclusions and Recommendation………………….……..………....91
Chapter – 8 Summary………..……………………………………………..……….93

ANNEXURE I - PROJECT PROPOSAL…………………………………………….94

ANNEXURE II - REFERENCES……………………………………………….….....99
ANNEXURE III - LIST OF CHARTS, FIGURES, DIAGRAMS & TABLES..….100

CHAPTER -1

INTRODUCTION

There are a lot of investment avenues available today in the financial market for an investor
with an investible surplus. He can invest in Bank Deposits, Corporate Debentures, and
Bonds where there is low risk but low return. He may invest in Stock of companies where
the risk is high and the returns are also proportionately high. The recent trends in the
Stock Market have shown that an average retail investor always lost with periodic bearish
tends. People began opting for portfolio managers with expertise in stock markets who
would invest on their behalf. Thus we had wealth management services provided by

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many institutions. However they proved too costly for a small investor. These investors
have found a good shelter with the mutual funds.

Mutual fund industry has seen a lot of changes in past few years with multinational
companies coming into the country, bringing in their professional expertise in managing
funds worldwide. In the past few months there has been a consolidation phase going on
in the mutual fund industry in India. Now investors have a wide range of Schemes to
choose from depending on their individual profiles.

Today an investor is interested in tracking the value of his investments, whether he

invests directly in the market or indirectly through Mutual Funds. This dynamic change
has taken place because of a number of reasons. With globalization and the growing
competition in the investments opportunity available he would have to make guided and
rational decisions on whether he gets an acceptable return on his investments in the funds
selected by him, or if he needs to switch to another fund.

In order to achieve such an end the investor has to understand the basis of appropriate
preference measurement for the fund, and acquire the basic knowledge of the different
measures of evaluating the performance of the fund. Only then would he be in a position
to judge correctly whether his fund is performing well or not, and make the right
decision.

The project’s idea is to project Mutual Fund as a better avenue for investment on a
long-term or short-term basis. Mutual Fund is a productive package for a lay-investor
with limited finances, this project creates an awareness that the Mutual Fund is a
worthy investment practice. Mutual Fund is a globally proven instrument. Mutual
Funds are ”Unit Trust” as it is called in some parts of the world has a long and
successful history, of late Mutual Funds have become a hot favorite of millions of
people all over the world.

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The driving force of Mutual Funds is the ‘safety of the principal’ guaranteed, plus the
added advantage of capital appreciation together with the income earned in the form of
interest or dividend. The various schemes of Mutual Funds provide the investor with a
wide range of investment options according to his risk bearing capacities and interest
besides; they also give handy return to the investor. Mutual Funds offers an investor to
invest even a small amount of money, each Mutual Fund has a defined investment
objective and strategy. Mutual Funds schemes are managed by respective asset
managed companies sponsored by financial institutions, banks, private companies or
international firms. A Mutual Fund is the ideal investment vehicle for today’s complex
and modern financial scenario.

The study is basically made to analyze the various open-ended equity schemes of
different Asset Management Companies to highlight the diversity of investment that
Mutual Fund offer. Thus, through the study one would understand how a common man
could fruitfully convert a pittance into great penny by wisely investing into the right
scheme according to his risk taking abilities.

CHAPTER-2

OBJECTIVE AND SCOPE OF STUDY

2.1 OBJECTIVE
The study has following objectives:

 To project Mutual Fund as the ‘productive avenue’ for investing activities.

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  To show the wide range of investment options available in Mutual Funds by
explaining its various schemes.
 To compare the schemes based on Sharpe’s ratio, Treynor’s ratio, β Co-
efficient, Returns and show which scheme is best for the investor based on
his risk profile.
 To help an investor make a right choice of investment, while considering the
inherent risk factors.
 To understand the recent trends in Mutual Funds world.

2.2 SCOPE OF THE STUDY

The study here has been limited to analyze open-ended equity Growth schemes of
different Asset Management Companies namely Kotak Mahindra Mutual Fund,
Reliance Mutual Fund, HDFC Mutual Fund, Franklin Templeton Mutual Fund,
HSBC Mutual Funds each scheme is analysed according to its performance against
the other, based on factors like Sharpe’s Ratio, Treynor’s Ratio, β (Beta) Co-
efficient, Returns.

CHAPTER – 3

LIMITATIONS

Any study which is undertaken has some limitations. This study also has following
limitations:

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 The study is limited only to the analysis of different schemes and its suitability
to different investors according to their risk-taking ability.

 The study is based on secondary data available from monthly fact sheets,
websites and other books, as primary data was not accessible.

 The study is limited by the detailed study of various schemes of Five Asset
Management Company.

CHAPTER - 4

THEORETICAL PERSPECTIVES

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4.1 INDUSTRY PROFILE

About Mutual Fund Industry

Mutual Funds are financial intermediaries which pool the savings of numerous
individuals and invest the money, thus related in a diversified portfolio of securities,
including equity, bonds debentures and other money market instruments, thus spreading
and reducing risk. The objective of mutual fund is to maximize the return to the investor
who participates in equity indirectly through mutual funds.

Even though the mutual fund industry grown in asset value from Rs.7000 Crores to
2,00,000/- Crores today, this is just the tip of the iceberg. According to most Fund
Managers, the real boom is yet to come.

The sum of Rs.2,00,000/- Crores represents just 3% - 4% of the total market

capitalization of 25,00,000 Crore. This compares poorly with the US, where the mutual
funds have nearly $ 6.8 billion of market capitalization of roughly Rs.70000 Crore,
barely 3% - 4% of total market capitalization.

This is not expected, because mutual fund history in India, which dates back to 1964,
when the first open-ended mutual fund scheme Unit-64 was launched by Unit Trust of
India, is still dominated by it. The focus initially was income earning securities, with only
20 % of the Corpus going into equity. The early 80’s saw other schemes like the growing
income, fixed income, and monthly income being introduced by the UTI. But it was only
in 1986 that the first pure Growth equity scheme Master share was launched.

1989-90 was another landmark year in the history of mutual funds. For the fist time, the
monopoly of UTI over the industry was broken. The government allowed public sector
banks and insurance companies to enter this sector to bring in some competition.

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But it was only in 1993, when the private sector was given the green signal to float
mutual funds, that excitement and competition came. Not only did the Government
allowed Indian companies to float mutual funds, it even allowed foreign funds to set in
shop in India and float funds. Thus, in one stroke, this sector was truly privatized.

Today there are about 12-14 private players in the market including foreign funds such as
Morgan Stanley, besides the nine public sector players and UTI. Together, these funds
have mobilized around Rs.6500 Crore from the market. The collections could have been
better, had not the public sector funds been busy complying with the SEBI guidelines
pertaining to the formation of asset management companies etc.

But the best is yet to come. A number of companies have plans to float mutual funds at
various stages of implementation. Some of the major names which are likely to come to
the market are Tata Sons in collaboration with Kleinwort Benson, ITC Classic with
Thread needle UR, Oppenheimer of US, plus a host of others. And according to
conservative guesstimates, mutual funds are set to collect over Rs.10000 Crore from the
market this year.

The reason for such confidence is that with SEBI firm about the small investor taking the
mutual fund route to investments in the stock market, and the regulatory changes making
it much more difficult to get allotments in primary markets; small investors will not be
left with many opportunities.

4.2 Concept and role of Mutual Fund

WHAT IS MUTUAL FUND

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SEBI Mutual Fund Regulation act, 1996, defines a Mutual Fund as “a fund
established in the form of a trust by a sponsor to raise money by the Trustees through
the sale of units to the public under one or more schemes for investing in securities in
accordance with these regulations”.

A Mutual Fund is common pool of money into which Investor place their contributions
that are to be invested in accordance with a stated objective. The ownership of the Fund
is thus joint or “mutual”; the fund belongings to all investors.
A single investor’s ownership of the fund is in the same proportion as the amount of the
contribution made by him or her bears to the total amount of the fund.

Mutual Fund Operation Flow Chart

(Figure-1)

A Mutual fund uses the money collected from investors to buy those assets, which are
specifically permitted by its stated investment objective. Thus, an Equity Fund would
buy mainly Equity assets-ordinary shares, preference shares, warrants etc. A bond fund
would mainly buy debt instruments such as debentures, bonds or government securities.
It is these assets, which are owned by the investors in the same proportions as there
contribution bears to the total contribution of all investors put together.

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When an investor subscribes to a mutual fund, he or she buys a part of these assets or the
pool of funds that are outstanding at that time. It’s no different from buying “shares”
of a joint stock company, in which case the purchase makes the investor a part owner
of the company and its assets. In fact, in the USA, a Mutual fund is constituted as an
investment company and an investor “buys into the fund”, meaning he buys the
shares of the fund. In India, a mutual fund is constituted as a Trust and the investor
subscribes to the “units” issued by the fund, which is where the term unit Trust
comes from.

IMPORTANT CHARACTERISTICS OF THE MUTUAL FUND

1. A mutual fund actually belongs to the investors who have pooled their funds.
The ownership of the mutual fund is in the hand of the investor

2. A mutual fund is managed by investment professional and other service

providers who earn a fee for their services from the fund

3. The pool of funds is invested in a portfolio of marketable investments. The

value of the portfolio is updated every day.

4. The investor’s share in the fund is denominated by “UNIT”. The value of the
unit changes with changes in the portfolio value every day the value of the
unit of investment is called as the Net Assets Value or NAV.

5. The investment portfolio of the fund is created according to the stated

investment objectives of the fund.

Every Mutual Fund is managed by a fund manager, who using his investment
management skills and necessary research works ensures much better return than what an
investor can manage on his own. The capital appreciation and other incomes earned from

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these investments are passed on to the investors (also known as unit holders) in
proportion of the number of units they own.

(Figure-2)

When an investor subscribes for the units of a mutual fund, he becomes part owner of the
assets of the fund in the same proportion as his contribution amount put up with the
corpus (the total amount of the fund). Mutual Fund investor is also known as a mutual
fund shareholder or a unit holder.

Any change in the value of the investments made into capital market instruments (such as
shares, debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is
defined as the market value of the Mutual Fund scheme's assets net of its liabilities. NAV
of a scheme is calculated by dividing the market value of scheme's assets by the total
number of units issued to the investors.

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4.3 CONTRIBUTION OF VARIOUS PLAYERS IN MUTUAL FUND
MARKET IN INDIA

Currently the total funds under mutual fund management in India are a little over
Rs.3, 26,388 crore. Out of this UTI accounts for nearly 70 percent while the private funds
account for around 22 percent. The balance 8 percent is managed by mutual funds floated
by public sector banks and financial institutions.

CONTRIBUTION OF VARIOUS PLAYERS IN

MUTUAL FUNDS MARKET IN INDIA

8%
22% UTI
PRIVATE FUNDS
PUBLIC BANKS
70%

(Chart-1)

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List of Members:
A) Bank Sponsored
1. Joint Ventures - Predominantly Indian
a. SBI Funds Management Private Ltd.

2. Others
a. BOB Asset Management Co. Ltd.
b. Canbank Investment Management Services Ltd.
c. UTI Asset Management Co. Private Ltd.

B) Institutions
a. Jeevan Bima Sahayog Asset Management Co. Ltd.

C) Private Sector

1. Indian
a. Benchmark Asset Management Co. Private Ltd.
b. Cholamandalam Asset Management Co. Ltd.
c. Credit Capital Asset Management Co. Ltd.
d. Escorts Asset Management Ltd.
e. J. M. Financial Asset Management Private Ltd.
f. Kotak Mahindra Asset Management Co. Ltd.
g. Quantum Asset Management Co. Private Ltd.
h. Reliance Capital Asset Management Ltd.
i. Sahara Asset Management Co. Private Ltd
j. Sundaram Asset Management Co. Ltd.
k. Tata Asset Management Ltd.

2. Joint Ventures - Predominantly Indian

a. Birla Sun Life Asset Management Co. Ltd.

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b. DSP Merrill Lynch Fund Managers Ltd.
c. HDFC Asset Management Co. Ltd.
d. Prudential ICICI Asset Management Co. Ltd.

3. Joint Ventures - Predominantly Foreign

a. ABN AMRO Asset Management (India) Ltd.
b. Deutsche Asset Management (India) Private Ltd.
c. Fidelity Fund Management Private Ltd.
d. Franklin Templeton Asset Management (India) Private Ltd.
e. HSBC Asset Management (India) Private Ltd.
f. ING Investment Management (India) Private Ltd.
g. Morgan Stanley Investment Management Private Ltd.
h. Principal Pnb Asset Management Co. Private Ltd.
i. Standard Chartered Asset Management Co. Private Ltd.

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 Assets Under Management (AUM) as at the end of MAR-2009 (Rs in Lakhs)
Average AUM For The Month
Excluding Fund of
Sr No Mutual Fund Name Funds - Domestic but Fund Of Funds -
including Fund of Domestic
Funds - Overseas
1 AIG Global Investment Group Mutual Fund 137694.56 0
2 Baroda Pioneer Mutual Fund 113201.06 0
3 Benchmark Mutual Fund 106856.68 0
4 Bharti AXA Mutual Fund 19651.85 0
5 Birla Sun Life Mutual Fund 4709622.86 1478.04
6 Canara Robeco Mutual Fund 474388.13 0
7 DBS Chola Mutual Fund 102349.02 0
8 Deutsche Mutual Fund 935510.47 0
9 DSP BlackRock Mutual Fund 1441273.29 0
10 Edelweiss Mutual Fund 2228.34 0
11 Escorts Mutual Fund 18152.64 0
12 Fidelity Mutual Fund 617290.87 2822.87
13 Fortis Mutual Fund 581105.21 10648.00
14 Franklin Templeton Mutual Fund 1920529.86 16000.64
15 Goldman Sachs Mutual Fund N/A N/A
16 HDFC Mutual Fund 5795644.71 0
17 HSBC Mutual Fund 957519.09 0
18 ICICI Prudential Mutual Fund 5143250.24 2360.94
19 IDFC Mutual Fund 1436219.88 1441.08
20 ING Mutual Fund 252874.88 18485.84
21 JM Financial Mutual Fund 478756.21 0
22 JPMorgan Mutual Fund 245352.91 0
23 Kotak Mahindra Mutual Fund 1820404.34 16592.36
24 LIC Mutual Fund 2309237.33 0
25 Mirae Asset Mutual Fund 16208.46 0
26 Morgan Stanley Mutual Fund 134585.41 0
27 PRINCIPAL Mutual Fund 675687.05 0
28 Quantum Mutual Fund 5675.51 0
29 Reliance Mutual Fund 8096293.55 0
30 Religare AEGON Mutual Fund N/A N/A
31 Religare Mutual Fund 602283.90 0
32 Sahara Mutual Fund 14592.57 0
33 SBI Mutual Fund 2638268.15 0
34 Shinsei Mutual Fund N/A N/A
35 Sundaram BNP Paribas Mutual Fund 926706.92 0

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36 Tata Mutual Fund 1702987.17 0
37 Taurus Mutual Fund 20836.41 0
38 UTI Mutual Fund 4875417.00 0
Grand Total 49328656.53 69829.77

(Table-1)

4.4 ORGANISATION AND MANAGEMENT OF MUTUAL

FUNDS:-
In India Mutual Fund usually formed as trusts, three parties are generally involved viz.
• Settler of the trust or the sponsoring organization.
• The trust formed under the Indian trust act, 1982 or the trust company
registered under the Indian companies act, 1956
• Fund mangers or The merchant-banking unit
• Custodians.
STRUCTURE OF A MUTUAL FUND

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 Sponsor

Trustee Mutual
s fund

ASSET
MANAGEMENT
COMPANY

Custodia Registra
n r

(Figure-3)

The structure of mutual fund in India is governed by SEBI (MUTUAL FUND)

regulations 1996. These regulations make it mandatory for mutual funds to have a three-
tier structure of SPONSOR-TRUSTEE-ASSET MANAGEMENT COMPANY (AMC).

Organizational set up of mutual fund

17
 (Figure-4)

MUTUAL FUNDS TRUST:-

Mutual fund trust is created by the sponsors under the Indian trust act, 1982, which is
the main body in the creation of Mutual Fund trust.
The main functions of Mutual Fund trust are as follows:
♦ Planning and formulating Mutual Funds schemes.
♦ Seeking SEBI’s approval and authorization to these schemes.
♦ Marketing the schemes for public subscription.
♦ Seeking RBI approval in case NRI’s subscription to Mutual Fund is Invited
♦ Attending to trusteeship function. This function as per guidelines can be
assigned to separately established trust companies too. Trustees are required to
submit a consolidated report six monthly to SEBI to ensure that the guidelines
are fully being complied with trusted are also required to submit an annual
report to the investors in the fund.
FUND MANAGERS (OR) THE ASSES MANAGEMENT COMPANY
(AMC)
AMC has to discharge mainly three functions as under:

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 I. Taking investment decisions and making investments of the funds through
market dealer/brokers in the secondary market securities or directly in the
primary capital market or money market instruments

II. Realize fund position by taking account of all receivables and realizations,
moving corporate actions involving declaration of dividends,etc to compensate
investors for their investments in units; and

III. Maintaining proper accounting and information for pricing the units and
arriving at net asset value (NAV), the information about the listed schemes and
the transactions of units in the secondary market. AMC has to feed back the
trustees about its fund management operations and has to maintain a perfect
information system.

CUSTODIANS OF MUTUAL FUNDS:-

Mutual funds run by the subsidiaries of the nationalized banks had their
respective sponsor banks as custodians like canara bank, SBI, PNB, etc. Foreign
banks with higher degree of automation in handling the securities have assumed
the role of custodians for mutual funds. With the establishment of stock Holding
Corporation of India the work of custodian for mutual funds is now being handled
by it for various mutual funds. Besides, industrial investment trust company acts
as sub-custodian for stock Holding Corporation of India for domestic schemes of
UTI, BOI MF, LIC MF, etc

Fee structure:-Custodian charges ranges between 0.15% to 0.20% on the net

value of the customer’s holding for custodian services space is one important
factor which has fixed cost element.
RESPONSIBILITY OF CUSTODIANS:-
♦ Receipt and delivery of securities
♦ Holding of securities.

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 ♦ Collecting income
♦ Holding and processing cost
♦ Corporate actions etc

FUNCTIONS OF CUSTOMERS
♦ Safe custody
♦ Trade settlement
♦ Corporate action
♦ Transfer agents

RATE OF RETURN ON MUTUAL FUNDS:-

An investor in mutual fund earns return from two sources:
♦ Income from dividend paid by the mutual fund.
♦ Capital gains arising out of selling the units at a price higher than the
acquisition price

Formation and regulations:

1. Mutual funds are to be established in the form of trusts under the Indian trusts
act and are to be operated by separate asset management companies (AMC s)
2. AMC’s shall have a minimum Net worth of Rs. 5 crores;
3. AMC’s and Trustees of Mutual Funds are to be two separate legal entities and
that an AMC or its affiliate cannot act as a manager in any other fund;
4. Mutual funds dealing exclusively with money market instruments are to be
regulated by the Reserve Bank Of India
5. Mutual fund dealing primarily in the capital market and also partly money
market instruments are to be regulated by the Securities Exchange Board Of
India (SEBI)
6. All schemes floated by Mutual funds are to be registered with SEBI

Schemes:-

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 1. Mutual funds are allowed to start and operate both closed-end and open-end
schemes;
2. Each closed-end schemes must have a Minimum corpus (pooling up) of Rs
20 crore;
3. Each open-end scheme must have a Minimum corpus of Rs 50 crore
4. In the case of a Closed –End scheme if the Minimum amount of Rs 20 crore
or 60% of the target amount, which ever is higher is not raised then the entire
subscription has to be refunded to the investors;
5. In the case of an Open-Ended schemes, if the Minimum amount of Rs 50 crore
or 60 percent of the targeted amount, which ever is higher, is no raised then
the entire subscription has to be refunded to the investors.

Investment norms:-
1. No mutual fund, under all its schemes can own more than five percent of any
company’s paid up capital carrying voting rights;
2. No mutual fund, under all its schemes taken together can invest more than 10
percent of its funds in shares or debentures or other instruments of any single
company;
3. No mutual fund, under all its schemes taken together can invest more than 15
percent of its fund in the shares and debentures of any specific industry, except
those schemes which are specifically floated for investment in one or more
specified industries in respect to which a declaration has been made in the offer
letter.
4. No individual scheme of mutual funds can invest more than five percent of its
corpus in any one company’s share;
5. Mutual funds can invest only in transferable securities either in the money or in
the capital market. Privately placed debentures, securitized debt, and other
unquoted debt, and other unquoted debt instruments holding cannot exceed 10
percent in the case of growth funds and 40 percent in the case of income funds.

Distribution:

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Mutual funds are required to distribute at least 90 percent of their profits annually in
any given year. Besides these, there are guidelines governing the operations of mutual
funds in dealing with shares and also seeking to ensure greater investor protection
through detailed disclosure and reporting by the mutual funds. SEBI has also been
granted with powers to over see the constitution as well as the operations of mutual
funds, including a common advertising code. Besides, SEBI can impose penalties on
Mutual funds after due investigation for their failure to comply with the guidelines.

4.5 INVESTORS PROFILE:

An investor normally prioritizes his investment needs before undertaking an
investment, so different goals will be allocated to different proportions of the total
disposable amount. Investments for specific goals normally find their way into the debt
market as risk reduction is of prime importance, this is the area for the risk-averse

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investors and here, Mutual Funds are generally the best option. One can avail of the
benefits of better returns with added benefits of anytime liquidity by investing in open-
ended debt funds at lower risk, this risk of default by any company that one has chosen
to invest in, can be minimized by investing in Mutual Funds as the fund managers
analyze the companies financials more minutely than an individual can do as they have
the expertise to do so.

Moving up the risk spectrum, there are people who would like to take some risk and
invest in equity funds/capital market. However, since their appetite for risk is also
limited, they would rather have some exposure to debt as well. For these investors,
balanced funds provide an easy route of investment, armed with expertise of investment
techniques, they can invest in equity as well as good quality debt thereby reducing risks
and providing the investor with better returns than he could otherwise manage. Since
they can reshuffle their portfolio as per market conditions, they are likely to generate
moderate returns even in pessimistic market conditions.

Next comes the risk takers, risk takers by their nature, would not be averse to investing
in high-risk avenues. Capital markets find their fancy more often than not,
because they have historically generated better returns than any other avenue,
provided, the money was judiciously invested. Though the risk associated is
generally on the higher side of the spectrum, the return-potential compensates for
the risk attached.

4.5.1 Who Can Invest In Mutual Funds In India?

Mutual funds in India are open to investment by:

a) Residents including
1) Resident Indian Individuals

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 2) Indian Companies
3) Indian Trusts/Charitable Institutions
4) Banks
5) Non-Banking Finance Companies
6) Insurance Companies
7) Provident Funds

b) Non Residents including

1) Non-Resident Indians, and
2) Overseas Corporate Bodies (OCBs) and

c) Foreign entities, viz;

1) Foreign Institutional Investors (FIIs) registered with SEBI.

Foreign citizens/ entities are however not allowed to invest in Mutual funds in
India.

4.5.2 Five Easy Steps to Invest in Mutual Funds

1) Search: “Where to look for if we want to invest in MF”

a) Contacting an Investment advisor in a bank or a brokerage house or an Independent

Financial Advisor is the first step to gathering information.

b) Mutual funds units can also be bought over the Internet.

c) Mutual funds are much like any other product, in that there are manufacturers who
provide the product and there are dealers who sell them.

2) Evaluation: “Evaluation: choosing the right mutual fund for you

As an investor one may

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a) For the short term or long term want to invest

b) Want regular income or growth

c) Want to target lower risk or higher returns

d) Be convinced of a particular sector and want to invest in it

3) Purchase:

a) Systematic Investment Plan (SIP): Allows you to save a part of your income
regularly, also used to reduce risk when investing in schemes targeting aggressive
growth.

b) Systematic Withdrawal Plan (SWP): Allows you to withdraw a part of your

investment regularly. Used when you want to withdraw your investment for a specific
regular payment, like insurance premium payments of monthly/quarterly frequency.

c) Automatic debit: Saves the hassle of writing a cheque when making an investment.
Your account is debited automatically for the amount invested.

d) Dividend Plan:

A) Dividend Payout: Under this plan investor can redeem his/her dividend at specific
times.

B) Dividend Reinvestment: Under this plan investor’s dividend is reinvested back to its
principal amount which therefore increases the number of units investor is holding.

e) Growth: Under this plan income generated from investment will put back to its
invested amount which therefore increases the value of each unit customer is holding.

4) Post Purchase Monitoring:

Once you have invested in an ongoing fund, expect a period of two to three days before
you receive an account statement on the address mentioned by you in your application
form.

a) The Account Statement

25
Your account statement indicates your current holding in the scheme that you have
invested.

b) The transaction slip: The transaction slip at the end of the account statement can be
used for additional purchases, redemptions or to intimate the mutual fund on any change
in bank mandates/address.

c) NAV: The NAVs of all the open-ended schemes are published at the fund's website,
financial newspapers and AMFI (Association of Mutual Funds) web-site
www.amfiindia.com.

5) EXIT:

Every AMC advice that every investor should monitor his/her units NAV periodically
but AMC also recommend their unit holders to not get swayed by short term
considerations in deciding their exit.

Redemption: In case of open ended funds investor can redeem his/her invested amount.
Most funds take 1-3 days to credit your account with your redemption proceeds.

4.5.3 Comparison of Investment products:

Investor tends to constantly compare one form of investment with other Investors
certainly look for the best returns for different option. However, to determine which

26
option is better, the comparison should be made in terms of other benefits that the
investor ought to look for in any investment.

Investment Returns Risk Investment Liquidity

Objective Tolerance Horizon

Equity Capital High High Long term High

appreciation
FI Bonds Income Moderate Low Med-long Moderate

Corporate Income Moderate High Med Low

Debentures

Corporate FDs Income Moderate High Med Low

Bank Deposits Income Low Generally low Flexible High

PPF Income Moderate Low Long term Moderate

Life Insurance Risk cover Low Low Long term Low

Gold Inflation hedge Moderate Low Long term Moderate

Real Estate Inflation hedge High Low Long term Low

Mutual Funds Capital growth & High High Flexible High

Income

(Table-2)

4.5.4 THE FIVE MOST COMMON MISTAKES MUTUAL

FUND INVESTORS MAKE

 Failing to stay invested for a longer period

27
  Worrying about portfolio turnover or dividends it pays

 Being affected by new in the market when you’re supposed to be investing for the
long term

 Selling out during bad markets

 Being impatient and losing confidence too soon.

INVESTORS THINK LONG TERM BUT ACT SHORT

TERM…..

4.6 TYPES OF MUTUAL FUNDS

General Classification of Mutual Funds

Open-end Funds | Closed-end Funds

Open-end Funds
Funds that can sell and purchase units at any point in time are classified as Open-end
Funds. The fund size (corpus) of an open-end fund is variable (keeps changing) because
of continuous selling (to investors) and repurchases (from the investors) by the fund. An
open-end fund is not required to keep selling new units to the investors at all times but is
required to always repurchase, when an investor wants to sell his units. The NAV of an
open-end fund is calculated every day.

Closed-end Funds
Funds that can sell a fixed number of units only during the New Fund Offer (NFO)
period are known as Closed-end Funds. The corpus of a Closed-end Fund remains
unchanged at all times. After the closure of the offer, buying and redemption of units by

28
the investors directly from the Funds is not allowed. However, to protect the interests of
the investors, SEBI provides investors with two avenues to liquidate their positions:

1. Closed-end Funds are listed on the stock exchanges where investors can buy/sell
units from/to each other. The trading is generally done at a discount to the NAV
of the scheme. The NAV of a closed-end fund is computed on a weekly basis
(updated every Thursday).
2. Closed-end Funds may also offer “buy-back of units” to the unit holders. In this
case, the corpus of the Fund and its outstanding units do get changed.

Load Funds | No-load Funds

Load Funds
Mutual Funds incur various expenses on marketing, distribution, advertising, portfolio
churning, fund manager’s salary etc. Many funds recover these expenses from the
investors in the form of load. These funds are known as Load Funds. A load fund may
impose following types of loads on the investors:

• Entry Load – Also known as Front-end load, it refers to the load charged to an
investor at the time of his entry into a scheme. Entry load is deducted from the
investor’s contribution amount to the fund.
• Exit Load – Also known as Back-end load, these charges are imposed on an
investor when he redeems his units (exits from the scheme). Exit load is deducted
from the redemption proceeds to an outgoing investor.
• Deferred Load – Deferred load is charged to the scheme over a period of time.
• Contingent Deferred Sales Charge (CDSC) – In some schemes, the percentage
of exit load reduces as the investor stays longer with the fund. This type of load is
known as Contingent Deferred Sales Charge.

No-load Funds

29
All those funds that do not charge any of the above mentioned loads are known as No-
load Funds.

Tax-exempt Funds | Non-Tax-exempt Funds

Tax-exempt Funds
Funds that invest in securities free from tax are known as Tax-exempt Funds. All open-
end equity oriented funds are exempt from distribution tax (tax for distributing income to
investors). Long term capital gains and dividend income in the hands of investors are tax-
free.

Non-Tax-exempt Funds
Funds that invest in taxable securities are known as Non-Tax-exempt Funds. In India, all
funds, except open-end equity oriented funds are liable to pay tax on distribution income.
Profits arising out of sale of units by an investor within 12 months of purchase are
categorized as short-term capital gains, which are taxable. Sale of units of an equity
oriented fund is subject to Securities Transaction Tax (STT). STT is deducted from the
redemption proceeds to an investor.

BROAD MUTUAL FUND TYPES

30
 (Figure-5)

1. Equity Funds

Equity funds are considered to be the more risky funds as compared to other fund types,
but they also provide higher returns than other funds. It is advisable that an investor
looking to invest in an equity fund should invest for long term i.e. for 3 years or more.
There are different types of equity funds each falling into different risk bracket. In the
order of decreasing risk level, there are following types of equity funds:

31
a. Aggressive Growth Funds – In Aggressive Growth Funds, fund managers aspire
for maximum capital appreciation and invest in less researched shares of
speculative nature. Because of these speculative investments Aggressive Growth
Funds become more volatile and thus, are prone to higher risk than other equity
funds.
b. Growth Funds – Growth Funds also invest for capital appreciation (with time
horizon of 3 to 5 years) but they are different from Aggressive Growth Funds in
the sense that they invest in companies that are expected to outperform the market
in the future. Without entirely adopting speculative strategies, Growth Funds
invest in those companies that are expected to post above average earnings in the
future.
c. Speciality Funds – Speciality Funds have stated criteria for investments and their
portfolio comprises of only those companies that meet their criteria. Criteria for
some speciality funds could be to invest/not to invest in particular
regions/companies. Speciality funds are concentrated and thus, are comparatively
riskier than diversified funds.. There are following types of speciality funds:
i. Sector Funds: Equity funds that invest in a particular sector/industry of
the market are known as Sector Funds. The exposure of these funds is
limited to a particular sector (say Information Technology, Auto, Banking,
Pharmaceuticals or Fast Moving Consumer Goods) which is why they are
more risky than equity funds that invest in multiple sectors.
ii. Foreign Securities Funds: Foreign Securities Equity Funds have the
option to invest in one or more foreign companies. Foreign securities
funds achieve international diversification and hence they are less risky
than sector funds. However, foreign securities funds are exposed to
foreign exchange rate risk and country risk.
iii. Mid-Cap or Small-Cap Funds: Funds that invest in companies having
lower market capitalization than large capitalization companies are called
Mid-Cap or Small-Cap Funds. Market capitalization of Mid-Cap
companies is less than that of big, blue chip companies (less than Rs. 2500
crores but more than Rs. 500 crores) and Small-Cap companies have

32
 market capitalization of less than Rs. 500 crores. Market Capitalization of
a company can be calculated by multiplying the market price of the
company’s share by the total number of its outstanding shares in the
market. The shares of Mid-Cap or Small-Cap Companies are not as liquid
as of Large-Cap Companies which gives rise to volatility in share prices
of these companies and consequently, investment gets risky.
iv. Option Income Funds*: While not yet available in India, Option Income
Funds write options on a large fraction of their portfolio. Proper use of
options can help to reduce volatility, which is otherwise considered as a
risky instrument. These funds invest in big, high dividend yielding
companies, and then sell options against their stock positions, which
generate stable income for investors.
d. Diversified Equity 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. One prominent
type of diversified equity fund in India is Equity Linked Savings Schemes
(ELSS). As per the mandate, a minimum of 90% of investments by ELSS should
be in equities at all times. ELSS investors are eligible to claim deduction from
taxable income (up to Rs 1 lakh) at the time of filing the income tax return. ELSS
usually has a lock-in period and in case of any redemption by the investor before
the expiry of the lock-in period makes him liable to pay income tax on such
income(s) for which he may have received any tax exemption(s) in the past.
e. Equity Index Funds – Equity Index Funds have the objective to match the
performance of a specific stock market index. The portfolio of these funds
comprises of the same companies that form the index and is constituted in the
same proportion as the index. Equity index funds that follow broad indices (like
S&P CNX Nifty, Sensex) are less risky than equity index funds that follow
narrow sectoral indices (like BSEBANKEX or CNX Bank Index etc). Narrow
indices are less diversified and therefore, are more risky.

33
 f. Value Funds – Value Funds invest in those companies that have sound
fundamentals and whose share prices are currently under-valued. The portfolio of
these funds comprises of shares that are trading at a low Price to Earning Ratio
(Market Price per Share / Earning per Share) and a low Market to Book Value
(Fundamental Value) Ratio. Value Funds may select companies from diversified
sectors and are exposed to lower risk level as compared to growth funds or
speciality funds. Value stocks are generally from cyclical industries (such as
cement, steel, sugar etc.) which make them volatile in the short-term. Therefore, it
is advisable to invest in Value funds with a long-term time horizon as risk in the
long term, to a large extent, is reduced.
g. Equity Income or Dividend Yield Funds – The objective of Equity Income or
Dividend Yield Equity Funds is to generate high recurring income and steady
capital appreciation for investors by investing in those companies which issue
high dividends (such as Power or Utility companies whose share prices fluctuate
comparatively lesser than other companies’ share prices). Equity Income or
Dividend Yield Equity Funds are generally exposed to the lowest risk level as
compared to other equity funds

2. Debt / Income Funds

Funds that invest in medium to long-term debt instruments issued by private companies,
banks, financial institutions, governments and other entities belonging to various sectors
(like infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are
low risk profile funds that seek to generate fixed current income (and not capital
appreciation) to investors. In order to ensure regular income to investors, debt (or
income) funds distribute large fraction of their surplus to investors. Although debt
securities are generally less risky than equities, they are subject to credit risk (risk of
default) by the issuer at the time of interest or principal payment. To minimize the risk of
default, debt funds usually invest in securities from issuers who are rated by credit rating
agencies and are considered to be of “Investment Grade”. Debt funds that target high
returns are more risky. Based on different investment objectives, there can be following
types of debt funds:

34
a. Diversified Debt Funds – Debt funds that invest in all securities issued by
entities belonging to all sectors of the market are known as diversified debt funds.
The best feature of diversified debt funds is that investments are properly
diversified into all sectors which results in risk reduction. Any loss incurred, on
account of default by a debt issuer, is shared by all investors which further
reduces risk for an individual investor.
b. Focused Debt Funds* - Unlike diversified debt funds, focused debt funds are
narrow focus funds that are confined to investments in selective debt securities,
issued by companies of a specific sector or industry or origin. Some examples of
focused debt funds are sector, specialized and offshore debt funds, funds that
invest only in Tax Free Infrastructure or Municipal Bonds. Because of their
narrow orientation, focused debt funds are more risky as compared to diversified
debt funds. Although not yet available in India, these funds are conceivable and
may be offered to investors very soon.
c. High Yield Debt funds – As we now understand that risk of default is present in
all debt funds, and therefore, debt funds generally try to minimize the risk of
default by investing in securities issued by only those borrowers who are
considered to be of “investment grade”. But, High Yield Debt Funds adopt a
different strategy and prefer securities issued by those issuers who are considered
to be of “below investment grade”. The motive behind adopting this sort of risky
strategy is to earn higher interest returns from these issuers. These funds are more
volatile and bear higher default risk, although they may earn at times higher
returns for investors.
d. Assured Return Funds – Although it is not necessary that a fund will meet its
objectives or provide assured returns to investors, but there can be funds that
come with a lock-in period and offer assurance of annual returns to investors
during the lock-in period. Any shortfall in returns is suffered by the sponsors or
the Asset Management Companies (AMCs). These funds are generally debt funds
and provide investors with a low-risk investment opportunity. However, the
security of investments depends upon the net worth of the guarantor (whose name
is specified in advance on the offer document). To safeguard the interests of

35
 investors, SEBI permits only those funds to offer assured return schemes whose
sponsors have adequate net-worth to guarantee returns in the future. In the past,
UTI had offered assured return schemes (i.e. Monthly Income Plans of UTI) that
assured specified returns to investors in the future. UTI was not able to fulfill its
promises and faced large shortfalls in returns. Eventually, government had to
intervene and took over UTI’s payment obligations on itself. Currently, no AMC
in India offers assured return schemes to investors, though possible.
e. Fixed Term Plan Series – Fixed Term Plan Series usually are closed-end
schemes having short term maturity period (of less than one year) that offer a
series of plans and issue units to investors at regular intervals. Unlike closed-end
funds, fixed term plans are not listed on the exchanges. Fixed term plan series
usually invest in debt / income schemes and target short-term investors. The
objective of fixed term plan schemes is to gratify investors by generating some
expected returns in a short period.

3. Gilt Funds
Also known as Government Securities in India, Gilt Funds invest in government papers
(named dated securities) having medium to long term maturity period. Issued by the
Government of India, these investments have little credit risk (risk of default) and
provide safety of principal to the investors. However, like all debt funds, gilt funds too
are exposed to interest rate risk. Interest rates and prices of debt securities are inversely
related and any change in the interest rates results in a change in the NAV of debt/gilt
funds in an opposite direction.

4. Money Market / Liquid Funds

Money market / liquid funds invest in short-term (maturing within one year) interest
bearing debt instruments. These securities are highly liquid and provide safety of
investment, thus making money market / liquid funds the safest investment option when
compared with other mutual fund types. However, even money market / liquid funds are
exposed to the interest rate risk. The typical investment options for liquid funds include

36
Treasury Bills (issued by governments), Commercial papers (issued by companies) and
Certificates of Deposit (issued by banks).

5. Hybrid Funds
As the name suggests, hybrid funds are those funds whose portfolio includes a blend of
equities, debts and money market securities. Hybrid funds have an equal proportion of
debt and equity in their portfolio. There are following types of hybrid funds in India:

a. Balanced Funds – The portfolio of balanced funds include assets like debt
securities, convertible securities, and equity and preference shares held in a
relatively equal proportion. The objectives of balanced funds are to reward
investors with a regular income, moderate capital appreciation and at the same
time minimizing the risk of capital erosion. Balanced funds are appropriate for
conservative investors having a long term investment horizon.
b. Growth-and-Income Funds – Funds that combine features of growth funds and
income funds are known as Growth-and-Income Funds. These funds invest in
companies having potential for capital appreciation and those known for issuing
high dividends. The level of risks involved in these funds is lower than growth
funds and higher than income funds.
c. Asset Allocation Funds – Mutual funds may invest in financial assets like
equity, debt, money market or non-financial (physical) assets like real estate,
commodities etc.. Asset allocation funds adopt a variable asset allocation strategy
that allows fund managers to switch over from one asset class to another at any
time depending upon their outlook for specific markets. In other words, fund
managers may switch over to equity if they expect equity market to provide good
returns and switch over to debt if they expect debt market to provide better
returns. It should be noted that switching over from one asset class to another is a
decision taken by the fund manager on the basis of his own judgment and
understanding of specific markets, and therefore, the success of these funds
depends upon the skill of a fund manager in anticipating market trends.

37
6. Commodity Funds
Those funds that focus on investing in different commodities (like metals, food grains,
crude oil etc.) or commodity companies or commodity futures contracts are termed as
Commodity Funds. A commodity fund that invests in a single commodity or a group of
commodities is a specialized commodity fund and a commodity fund that invests in all
available commodities is a diversified commodity fund and bears less risk than a
specialized commodity fund. “Precious Metals Fund” and Gold Funds (that invest in
gold, gold futures or shares of gold mines) are common examples of commodity funds.

7. Real Estate Funds

Funds that invest directly in real estate or lend to real estate developers or invest in
shares/securitized assets of housing finance companies, are known as Specialized Real
Estate Funds. The objective of these funds may be to generate regular income for
investors or capital appreciation.

8. Exchange Traded Funds (ETF)

Exchange Traded Funds provide investors with combined benefits of a closed-end and an
open-end mutual fund. Exchange Traded Funds follow stock market indices and are
traded on stock exchanges like a single stock at index linked prices. The biggest
advantage offered by these funds is that they offer diversification, flexibility of holding a
single share (tradable at index linked prices) at the same time. Recently introduced in
India, these funds are quite popular abroad.

9. Fund of Funds
Mutual funds that do not invest in financial or physical assets, but do invest in other
mutual fund schemes offered by different AMCs, are known as Fund of Funds. Fund of
Funds maintain a portfolio comprising of units of other mutual fund schemes, just like
conventional mutual funds maintain a portfolio comprising of equity/debt/money market
instruments or non financial assets. Fund of Funds provide investors with an added
advantage of diversifying into different mutual fund schemes with even a small amount

38
of investment, which further helps in diversification of risks. However, the expenses of
Fund of Funds are quite high on account of compounding expenses of investments into
different mutual fund schemes.
* Funds not yet available in India

4.7 VALUATION OF MUTUAL FUND

The net asset value of the Fund is the cumulative market value of the assets Fund net of
its liabilities. In other words, if the Fund is dissolved or liquidated, by selling off all the
assets in the Fund, this is the amount that the shareholders would collectively own. This
gives rise to the concept of net asset value per unit, which is the value, represented by the
ownership of one unit in the Fund. It is calculated simply by dividing the net asset value
of the Fund by the number of units. However, most people refer loosely to the NAV per
unit as NAV, ignoring the “per unit”. We also abide by the same convention.

Calculation of NAV
The most important part of the calculation is the valuation of the assets owned by the
Fund. Once it is calculated, the NAV is simply the net value of assets divided by the
number of units outstanding. The detailed methodology for the calculation of the net
asset value is given below.
The net asset value is the actual value of a unit on any business day. NAV is the
barometer of the performance of the scheme. The net asset value is the market value of
the assets of the scheme minus its liabilities and expenses. The per unit NAV is the net
asset value of the scheme divided by the number of the units outstanding on the valuation
date.

39
MUTUAL FUND SCHEME TYPES:

Equity Diversified Schemes

These schemes, also commonly called Growth Schemes, seek to invest a majority of their
funds in equities and a small portion in money market instruments. They seek to achieve
long-term capital appreciation by responding to the dynamically changing Indian
economy by moving across sectors such as Lifestyle, Pharma, Cyclical, Technology,
etc.

♦ Sector Schemes
These schemes focus on particular sector as IT, Banking, etc. They seek to generate
long-term capital appreciation by investing in equity and related securities of
companies in that particular sector.

♦ Index Schemes
These schemes aim to provide returns that closely correspond to the return of a
particular stock market index such as BSE Sensex, NSE Nifty, etc. Such schemes
invest in all the stocks comprising the index in approximately the same weightage as
they are given in that index.

♦ Exchange Traded Funds (ETFs)

ETFs invest in stocks underlying a particular stock index like NSE Nifty or BSE
Sensex. They are similar to an index fund with one crucial difference. ETFs are listed
and traded on a stock exchange. In contrast, an index fund is bought and sold by the
fund and its distributors.

♦ Equity Tax Saving Schemes

These work on similar lines as diversified equity funds and seek to achieve long-term
capital appreciation by investing in the entire universe of stocks. The only difference
between these funds and equity-diversified funds is that they demand a lock-in of 3
years to gain tax benefits.

40
 ♦ Dynamic Funds
These schemes alter their exposure to different asset classes based on the market
scenario. Such funds typically try to book profits when the markets are overvalued and
remain fully invested in equities when the markets are undervalued. This is suitable for
investors who find it difficult to decide when to quit from equity.

Balanced Schemes
The aim of Balanced Funds is to provide both growth and regular income. Such schemes
periodically distribute a part of their earning and invest both in equities and fixed income
securities in the proportion indicated in their offer documents. This proportion affects the
risks and the returns associated with the balanced fund – in case equities are allocated a
higher proportion, investors would be exposed to risks similar to that of the equity
market.
Balanced funds with equal allocation to equities and fixed income securities are ideal for
investors looking for a combination of income and moderate growth These schemes seek
to achieve long-term capital appreciation with stability of investment and current
income from a balanced portfolio of high quality equity and fixed-income securities.

♦ Medium-Term Debt Schemes

These schemes have a portfolio of debt and money market instruments where the
average maturity of the underlying portfolio is in the range of five to seven years.

♦ Short-Term Debt Schemes

These schemes have a portfolio of debt and money market instruments where the

average maturity of the underlying portfolio is in the range of one to two years.

♦ Money Market Debt Schemes

These schemes invest in debt securities of a short-term nature, which generally means
securities of less than one-year maturity. The typical short-term interest-bearing

41
instruments these funds invest in Treasury Bills, Certificates of Deposit, Commercial
Paper and Inter-Bank Call Money Market.

♦ Medium-Term Gilt Schemes

These schemes invest in government securities. The average maturity of the securities

in the scheme is over three years.

♦ Short-Term Gilt Schemes

These schemes invest in government securities. The securities invested in are of short

to medium term maturities.

♦ Floating Rate Funds

They invest in debt securities with floating interest rates, which are generally linked to

some benchmark rate like MIBOR. Floating rate funds have a high relevance when

interest rates are on the rise helping investors to ride the interest rate rise.

♦ Monthly Income Plans (MIPS)

These are basically debt schemes, which make marginal investments in the range of 10-

25% in equity to boost the scheme’s returns. MIP schemes are ideal for investors who

seek slightly higher return that pure long-term debt schemes at marginally higher risk.

4.9 DIFFERENT MODES OF RECEIVING THE INCOME EARNED

FROM MUTUAL FUND INVESTMENTS
Mutual Funds offer three methods of receiving income:

♦ Growth Plan
In this plan, dividend is neither declared nor paid out to the investor but is built into the
value of the NAV. In other words, the NAV increases over time due to such incomes
and the investor realizes only the capital appreciation on redemption of his investment.

42
 ♦ Income Plan
In this plan, dividends are paid-out to the investor. In other words, the NAV only
reflects the capital appreciation or depreciation in market price of the underlying
portfolio.
♦ Dividend Re-investment Plan
In this case, dividend is declared but not paid out to the investor, instead, it is
reinvested back into the scheme at the then prevailing NAV. In other words, the
investor is given additional units and not cash as dividend.

MUTUAL FUND INVESTING STRATEGIES:

1. Systematic Investment Plans (SIPs)

These are best suited for young people who have started their careers and need to build
their wealth. SIPs entail an investor to invest a fixed sum of money at regular intervals
in the Mutual fund scheme the investor has chosen, an investor opting for SIP in xyz
Mutual Fund scheme will need to invest a certain sum on money every
month/quarter/half-year in the scheme.

2. Systematic Withdrawal Plans (SWPs)

These plans are best suited for people nearing retirement. In these plans, an investor
invests in a mutual fund scheme and is allowed to withdraw a fixed sum of money at
regular intervals to take care of his expenses.

3. Systematic Transfer Plans (STPs)

They allow the investor to transfer on a periodic basis a specified amount from one
scheme to another within the same fund family – meaning two schemes belonging to
the same mutual fund. A transfer will be treated as redemption of units from the
scheme from which the transfer is made. Such redemption or investment will be at the

43
applicable NAV. This service allows the investor to manage his investments actively to
achieve his objectives. Many funds do not even charge any transaction fees for his
service – an added advantage for the active investor.
4.10 ADVANTAGES OF INVESTING THROUGH MUTUAL
FUNDS:
There are several reasons that can be attributed to the growing popularity and
suitability of Mutual Funds as an investment vehicle especially for retail investors:
ASSET ALLOCATION
♦ Mutual Funds offer the investors a valuable tool – Asset Allocation. This is
explained by an example.
An investor investing Rs.1 lakh in a mutual fund scheme, which has collected Rs.100
crores and invested the money in various investment options, will have Rs.1 lakh spread
over a number of investment options as demonstrated below:

Total portfolio of
Percentage of
the Mutual Fund Investors portfolio
Investment Type Allocation (% of total
scheme (Rs. In allocation (Rs.)
portfolio)
crores)
EQUITY: 57% 57 57,000
State Bank of India 15% 15 15,000
Infosys Technologies 12% 12 12,000
ABB 10% 10 10,000
Reliance Industries 9% 9 9,000
MICO 7% 7 7,000
Tata Power 4% 4 4,000
DEBT: 43% 43 43,000
Govt. Securities 20% 20 20,000
Company Debentures 10% 10 10,000
Institution Bonds 9% 9 9,000
Money Market 4% 4 4,000
Total 100% 100 1,00,000
(Table-3)
Thus ‘Asset Allocation’ is allocating your investments in to different investment
options depending on your risk profile and return expectations.
• DIVERSIFICATION

44
Diversification is spreading your investment amount over a larger number of
investments in order to reduce risk. For instance, if you have Rs.10,000 to invest in
Information Technology (IT) stocks, this amount will only buy you a handful of
stocks of perhaps one or two companies. A fall in the market price of any of these
company stocks will significantly erode your investment amount instead it makes
sense to invest in an IT sector mutual fund scheme so that your Rs.10,000 is spread
across a larger number of stocks thereby reducing your risk.

• PROFESSIONALS AT WORK
Few investors have the time or expertise to manage their personal investments
every day, to efficiently reinvest interest or dividend income, or to investigate the
thousands of securities available in the financial markets. Fund managers are
professionals and experienced in tracking the finance markets, having access to
extensive research and market information, which enables them to decide which
securities to buy and sell for the fund. For an individual investor like you, this
professionalism is built in when you invest in the Mutual Fund.

• REDUCTION OF TRANSACTION COSTS

While investing directly in securities, all the costs of investing such as brokerage,
custodial services etc. Borne by you are at the highest rates due to small transaction
sizes. However, when going through a fund, you have the benefit of economies of
scale; the fund pays lesser costs because of larger volumes, a benefit passed on to
its investors like you.

• EASY ACCESS TO YOUR MONEY

This is one of the most important benefits of a Mutual Fund. Often you hold shares
or bonds that you cannot directly, easily and quickly sell. In such situations, it could
take several days or even longer before you are able to liquidate his Mutual Fund
investment by selling the units to the fund itself and receive his money within 3
working days.

• TRANSPARENCY

45
 The investor gets regular information on the value of his investment in addition to
disclosure on the specific investments made by the fund, the proportion invested in
each class of assets and the fund manager’s investment strategy and outlook.

• SAVING TAXES
Tax saving schemes of Mutual Funds offer investor a tax rebate under section 88 of
the Income Tax Act. Under this section, an investor can invest up to Rs.10,000 per
Financial year in a tax saving scheme. The rate of rebate under this section depends
on the investor’s total income.

• INVESTING IN STOCK MARKET INDEX

Index schemes of mutual funds give you the opportunity of investing in scrips that
make up a particular index in the same proportion of weightage that these scrips
have in the index. Thus, the return on your investment mirrors the movement of the
index.

• INVESTING IN GOVERNMENT SECURITIES

Gilt and Money Market Schemes of Mutual Funds also give you the opportunity to
invest in Government Securities and Money Markets (including the inter banking
call money market)

• WELL-REGULATED INDUSTRY
All Mutual Funds are registered with SEBI and they function within the provisions
of strict regulations designed to protect the interests of investors. The operations of
Mutual Funds are regularly monitored by SEBI.

• CONVENIENCE AND FLEXIBILITY

Mutual Funds offer their investors a number of facilities such as inter-fund transfers,
online checking of holding status etc, which direct investments don’t offer.

46
Mutual Fund Investment - Opportunities
• Opportunities of future expansion are very high.
• Corporate governance of Mutual Funds is being given emphasis.
• The Mutual funds in India has the scope of penetrating into the rural and semi
urban areas.
• The Securities Exchange Board of India has allowed the introduction of
commodity mutual funds

A number of foreign based assets Management Company are venturing into Indian
markets.

DISADVANTAGES OF MUTUAL FUNDS

The following are some of the reasons which are deterrent to mutual fund investment:

• Costs despite Negative Returns — Investors must pay sales charges, annual
fees, and other expenses regardless of how the fund performs. 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.

47
No Guarantees- No investment is risk free. If the entire stock market declines in value,
the value of mutual fund shares will go down as well, no matter how
balanced the portfolio. Investors encounter fewer risks when they invest in
mutual funds than when they buy and sell stocks on their own. However,
anyone who invests through mutual fund runs the risk of losing the
money.

4.11 EVOLUTION AND GROWTH OF MUTUAL FUND

INDUSTRY

4.11.1 The Evolution

The formation of Unit Trust of India marked the evolution of the Indian mutual fund
industry in the year 1963. The primary objective at that time was to attract the small
investors and it was made possible through the collective efforts of the Government of
India and the Reserve Bank of India. The history of mutual fund industry in India can be
better understood divided into following phases:

Phase 1. Establishment and Growth of Unit Trust of India – 1964-87

Unit Trust of India enjoyed complete monopoly when it was established in the year 1963
by an act of Parliament. UTI was set up by the Reserve Bank of India and it continued to
operate under the regulatory control of the RBI until the two were de-linked in 1978 and
the entire control was mobilization in the hands of Industrial Development Bank of India
(IDBI). UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US-64),
which attracted the largest number of investors in any single investment scheme over the
years.
UTI launched more innovative schemes in 1970s and 80s to suit the needs of different
investors. It launched ULIP in 1971, six more schemes between 1981-84, Children’s Gift
Growth Fund and India Fund (India’s first offshore fund) in 1986, Mastershare (India’s
first equity

48
diversified scheme) in 1987 and Monthly Income Schemes (offering assured returns)
during 1990s. By the end of 1987, UTI’s assets under management grew ten times to Rs
6700 crores.

Phase II. Entry of Public Sector Funds – 1987-1993

The Indian mutual fund industry witnessed a number of public sector players entering the
market in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of
India became the first non-UTI mutual fund in India. SBI Mutual Fund was later
followed by Canbank Mutual Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of
India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. By 1993, the assets under
management of the industry increased seven times to Rs. 47,004 crores. However, UTI
remained to be the leader with about 80% market share.

Mobilisa
tion as
Amo Assets
% of
unt Under
1992-93 gross
Mobi Manage
Domesti
lised ment
c
Savings

11,05
UTI 38,247 5.2%
7

Public
1,964 8,757 0.9%
Sector

13,02
Total 47,004 6.1%
1
(Table-4)

Phase III. Emergence of Private Secor Funds – 1993-96

The permission given to private sector funds including foreign fund management
Companies (most of them entering through joint ventures with Indian promoters) to
enter the mutual fund industry in 1993, provided a wide range of choice to investors and
more competition in the industry. Private funds introduced innovative products,

49
investment techniques and investor-servicing technology. By 1994-95, about 11 private
sector funds had launched their schemes.

Phase IV. Growth and SEBI Regulation – 1996-2004

The mutual fund industry witnessed robust growth and stricter regulation from the SEBI
after the year 1996. The Mobilization of funds and the number of players operating in the
industry reached new heights as investors started showing more interest in mutual funds.
Investors’ interests were safeguarded by SEBI and the Government offered tax benefits to
the investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was
introduced by SEBI that set uniform standards for all mutual funds in India. The Union
Budget in 1999 exempted all dividend incomes in the hands of investors from income tax.

Various Investor Awareness Programmes were launched during this phase, both by SEBI
and AMFI, with an objective to educate investors and make them informed about the
mutual fund industry.

In February 2003, the UTI Act was repealed and UTI was stripped of its Special legal
status as a trust formed by an Act of Parliament. The primary objective behind this was to
bring all mutal fund players on the same level. UTI was re-organised into two parts:
1. The Specified Undertaking, 2. The UTI Mutual Fund

Presently Unit Trust of India operates under the name of UTI Mutual Fund and its past
schemes (like US-64, Assured Return Schemes) are being gradually wound up. However,
UTI Mutual Fund is still the largest player in the industry. In 1999, there was a
significant growth in mobilization of funds from investors and assets under management
which is supported by the following data:

50
51
 GROSS FUND MOBILISATION (RS. CRORES)

PUBL PRIV
UT IC ATE TOTA
FROM TO
I SECT SECT L
OR OR

31-
11,
01-April-98 Marc 1,732 7,966 21,377
679
h-99

31-
13,
01-April-99 Marc 4,039 42,173 59,748
536
h-00

31-
12,
01-April-00 Marc 6,192 74,352 92,957
413
h-01

31-
4,6 1,46,2 1,64,52
01-April-01 Marc 13,613
43 67 3
h-02

31-
5,5 2,20,5 2,48,97
01-April-02 Jan- 22,923
05 51 9
03

31-
01-Feb.-03 Marc * 7,259* 58,435 65,694
h-03

31-
5,21,6 5,90,19
01-April-03 Marc - 68,558
32 0
h-04

31-
1,03,2 7,36,4 8,39,66
01-April-04 Marc -
46 16 2
h-05

31-
1,83,4 9,14,7 10,98,1
01-April-05 Marc -
46 12 58
h-06

52
 (Table-5)

ASSETS UNDER MANAGEMENT (RS. CRORES)

T
PUBL PRIV
U O
IC ATE
AS ON T T
SECT SECT
I A
OR OR
L

31- 68
March- 53,320 8,292 6,860 ,4
99 72

Phase V. Growth and Consolidation – 2004 Onwards

The industry has also witnessed several mergers and acquisitions recently, examples of
which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C
Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more
international mutal fund players have entered India like Fidelity, Franklin Templeton

53
Mutual Fund etc. There were 29 funds as at the end of March 2006. This is a continuing
phase of growth of the industry through consolidation and entry of new international and
private sector players.

GROWTH IN ASSETS UNDER MANAGEMENT

(Chart-2)
Future Scenario
The asset base will continue to grow at an annual rate of about 30 to 35 % over the next
few years as investor’s 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,

54
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.
The mutual fund industry is awaiting the introduction of derivatives in India 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, so that the mutual funds can implement the changes that are
required to trade in Derivatives.

4.11.2 GROWTH OF MUTUAL FUND INDUSTRY IN INDIA

55
The Indian Mutual Fund has passed through three phases. The first phase was between
1964 and 1987 and the only player was the Unit Trust of India, which had a total asset of
Rs. 6,700 crores at the end of 1988. The second phase is between 1987 and 1993 during
which period 8 Funds were established (6 by banks and one each by LIC and GIC). The
total assets under management had grown to 61,028 crores at the end of 1994 and the
number of schemes was 167.

The third phase began with the entry of private and foreign sectors in the Mutual Fund
industry in 1993. Kothari Pioneer Mutual Fund was the first Fund to be established by
the private sector in association with a foreign Fund.
As at the end of financial year 2000(31st march) 32 Funds were functioning with
Rs. 1, 13,005 crores as total assets under management. As on august end 2000, there
were 33 Funds with 391 schemes and assets under management with Rs 1, 02,849 crores.
The securities and Exchange Board of India (SEBI) came out with comprehensive
regulation in 1993 which defined the structure of Mutual Fund and Asset Management
Companies for the first time.

Several private sectors Mutual Funds were launched in 1993 and 1994. The share of the
private players has risen rapidly since then. Currently there are 34 Mutual Fund
organizations in India managing 1,02,000 crores. While the Indian mutual fund industry
has grown in size by about 320% from March, 1993 (Rs. 470 billion) to December, 2004
(Rs. 1505 billion) in terms of AUM, the AUM of the sector excluding UTI has grown
over 8 times from Rs. 152 billion in March 1999 to Rs. 1295 billion as at March 2005.

56
 Asset Under Management (excluding UTI)

1400
1295
1200 1201

1000
AUM (Rs. Bn.)

800
659
600
492
400 365 326
200
114 152
0
1998 1999 2000 2001 2002 2003 2004 2005

(Chart-3)

Though India is a minor player in the global mutual fund industry, its AUM as a
proportion of the global AUM has steadily increased and has doubled over its levels in
1999.
The growth rate of Indian mutual fund industry has been increasing for the last few years.
It was approximately 0.12% in the year of 1999 and it is noticed 0.25% in 2004 in terms
of AUM as percentage of global AUM.

Growth rate of Indian MF Industry

0.30%
AUM as % of Global AUM

0.25%

0.20%

0.15%

0.10%

0.05%

0.00%
1999 2000 2001 2002 2003 2004

(Chart-4)

57
 The GDP of different countries

9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
China Hong-Kong India Korea Singapore US

(Chart-5)

Now we can see from the above chart that India has robust GDP growth prospects.

4.12 Recent trends in 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
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 good start due to the stock market boom prevailing then. 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 the 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.
and it is doubtful whether, barring a few exceptions, they have serious plans of

58
continuing the activity in a major way. The experience of some of the AMCs floated by
private sector Indian companies was also very similar. They quickly realized that the
AMC business is a business, which makes money in the long term and requires deep-
pocketed support in the intermediate years. Some have sold out to foreign owned
companies, some have merged with others and there is general restructuring going on.
The foreign owned companies have deep pockets and have come in here with the
expectation of a long haul. They can be credited with introducing many new practices
such as new product innovation, sharp improvement in service standards and disclosure,
usage of technology, broker education and support etc. In fact, they have forced the
industry to upgrade itself and service levels of organizations like UTI have improved
dramatically in the last few years in response to the competition provided by these.

Some facts for the growth of mutual funds in India

• 100% growth in the last 6 years.

• Number of foreign AMC’s is 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 rurals like the Indian insurance industry with simple
and limited products.

• SEBI allowing the MF’s to launch commodity mutual funds.

59
 • Emphasis on better corporate governance.

• Trying to curb the late trading practices.

• Introduction of Financial Planners who can provide need based advice.

4.13 RISK FACTORS OF MUTUAL FUNDS

The Risk-Return Trade-off:

The most important relationship to understand is the risk-return trade-off. Higher the risk
greater the returns/loss and lower the risk lesser the returns/loss.
Hence it is up to you, the investor to decide how much risk you are willing to take. In
order to do this you must first be aware of the different types of risks involved with your
investment decision.

Market Risk: Sometimes prices and yields of all securities rise and fall. Broad outside
influences affecting the market in general lead to this. This is true, may it be big
corporations or smaller mid-sized companies. This is known as Market Risk. A
Systematic Investment Plan (“SIP”) that works on the concept of Rupee Cost Averaging
(“RCA”) might help mitigate this risk.

Credit Risk: The debt servicing ability (May it be interest payments or repayment of
principal) of a company through its cash flows determines the Credit Risk faced by you.
This credit risk is measured by independent rating agencies like CRISIL who rate
companies and their paper. An ‘AAA’ rating is considered the safest whereas a ‘D’ rating
is considered poor credit quality. A well-diversified portfolio might help mitigate this
risk.

Inflation Risk: Things you hear people talk about: “Rs. 100 today is worth more than
Rs. 100 tomorrow.” “Remember the time when a bus ride cost 50 paise?” “Mehangai Ka
Jamana Hai.”

60
The root cause, Inflation is the loss of purchasing power over time. A lot of times people
make conservative investment decisions to protect their capital but end up with a sum of
money that can buy less than what the principal could at the time of the investment. This
happens when inflation grows faster than the return on your investment. A well-
diversified portfolio with some investment in equities might help mitigate this risk.

Interest Rate Risk: In a free market economy interest rates are difficult if not impossible
to predict. Changes in interest rates affect the prices of bonds as well as equities. If
interest rates rise the prices of bonds fall and vice versa. Equity might be negatively
affected as well in a rising interest rate environment. A well-diversified portfolio might
help mitigate this risk.

Political/Government Policy Risk: Changes in government policy and political decision

can change the investment environment. They can create a favorable environment for
investment or vice versa.

Liquidity Risk: Liquidity risk arises when it becomes difficult to sell the securities that
one has purchased. Liquidity Risk can be partly mitigated by diversification, staggering
of maturities as well as internal risk controls that lean towards purchase of liquid
securities.

61
Risk Hierarchy of Different Mutual Funds
Thus, different mutual fund schemes are exposed to different levels of risk and investors
should know the level of risks associated with these schemes before investing. The
graphical representation hereunder provides a clearer picture of the relationship between
mutual funds and levels of risk associated with these funds:

(Chart-6)

62
 Snapshot of Mutual Fund Schemes
Mutual
Investment Who should
Fund Objective Risk Investment horizon
Portfolio invest
Type
Treasury Bills,
Liquidity + Those who park
Certificate of
Moderate their funds in
Money Deposits,
Income + Negligible current accounts 2 days - 3 weeks
Market Commercial
Reservation of or short-term bank
Papers, Call
Capital deposits
Money
Call Money,
Short-term Commercial
Funds Papers,
(Floating - Liquidity + Those with
Little Interest Treasury Bills, 3 weeks -
short-term) Moderate surplus
Rate CDs, Short- 3 months
Income short-term funds
term
Government
securities.
Bond Predominantly
Funds Debentures,
Credit Risk Salaried &
Government
Regular Income & Interest conservative More than 9 - 12 months
securities,
(Floating - Rate Risk investors
Corporate
Long-term) Bonds
Salaried &
Security & Interest Rate Government
Gilt Funds conservative 12 months & more
Income Risk securities
investors
Aggressive
Long-term
Equity investors with
Capital High Risk Stocks 3 years plus
Funds long term out
Appreciation
look.
To generate
returns that are Portfolio
NAV varies
Index commensurate indices like Aggressive
with index 3 years plus
Funds with returns of BSE, NIFTY investors.
performance
respective etc
indices
Balanced ratio
Capital of equity and
Balanced Growth & Market Risk debt funds to Moderate &
2 years plus
Funds Regular Income and Interest ensure higher Aggressive
Rate Risk returns at lower
risk

(Table-6)

Chapter – 5
63
 Methodology and Procedure of Work

5.1 RESEARCH DESIGN & DATA COLLECTION

The Methodology involves randomly selecting Open-Ended equity schemes of different

fund houses of the country. The research is on the COMPARATIVES STUDY
BETWEEN MUTUAL FUNDS OFFER BY VARIOUS COMPANIES IN INDIAN
MARKET. This research is secondary database oriented. Hence the research design
used is empirical research.
The data has been collected from various secondary sources like websites, various
reviews, and journals.

5.2 COMPANY FOCUS

For the study, searched many companies and finally focused some companies such that
Kotak Mahindra Mutual Fund, Reliance Mutual Fund, HDFC Mutual Fund,
Franklin Templeton Mutual Fund, HSBC Mutual Fund etc. each scheme is
analyzed according to its performance against the other, based on factors like Sharpe’s
Ratio, Treynor’s Ratio, β (Beta) Co-efficient, Returns.

The comparison between these schemes is made based on the following factors
A) Sharpe’s Ratio
B) Treynor’s Ratio
C) β (Beta) co-efficient.
D) Returns

A) The Sharpe’s 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.

64
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.

B) 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,
Rf is risk free rate of return,
and Bi is 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.

C) β (Beta) Co-efficient:-
Systematic risk 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

65
changes in the market; higher will be its beta. Beta is calculated by relating the returns
on a Mutual Fund with the returns in the market. While unsystematic risk can be
diversified through investments in a number of instruments, systematic risk cannot. By
using the risk return relationship, we try to assess the competitive strength of the
Mutual Funds vis-à-vis one another in a better way.
β (Beta) is calculated as N (Σ XY) – Σ XΣ Y
N (Σ X2) – (Σ X) 2

D) Returns:- Returns for the last one-year of different schemes are taken for the
comparison and analysis part.

5.3 Types of Research

5.3.1 Descriptive Research

This research is the most commonly used and the basic reason for carrying out
descriptive research is to identify the cause of something that is happening.

5.3.2 Exploratory Research

This genre of research simply allows the marketer to gain a greater understanding of
something that he doesn’t know enough about.

5.4 HYPOTHESIS
The Hypothesis of the study involves Comparison between:
1. Kotak Opportunities fund.
2. Reliance Equity Opportunities fund.
3. Franklin India Flexi fund.
4. HDFC Core & satellite fund.
5. HSBC India Opportunities fund.

66
 Chapter – 6
Analysis of Data

Note: All the data used for analysis is taken up to the period 28-febuary-2009

PERFORMANCE MEASURES OF MUTUAL FUNDS:

Mutual Fund industry today, with about 30 players and more than six hundred schemes,
is one of the most preferred investment avenues in India. However, with a plethora of
schemes to choose from, the retail investor faces problems in selecting funds. Factors
such as investment strategy and management style are qualitative, but the funds record
is an important indicator too.
Though past performance alone cannot be indicative of future performance, it is,
frankly, the only quantitative way to judge how good a fund is at present. Therefore,
there is a need to correctly assess the past performance of different Mutual Funds.
Worldwide, good Mutual Fund companies over are known by their AMC’s and this
fame is directly linked to their superior stock selection skills.

For Mutual Funds to grow, AMC’s 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 AMC’s.

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

67
 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 cannot. By using the risk return relationship, we try to assess the
competitive strength of the Mutual Funds one another in a better way. In order to
determine the risk-adjusted returns of investment portfolios, several eminent authors
have worked since 1960s to develop composite performance indices to evaluate a
portfolio by comparing alternative portfolios within a particular risk class.

The most important and widely used measures of performance are:

• The Treynor’Measure
• The Sharpe Measure
• Jenson Model
• Fama Model

1) 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,

68
 Ri represents return on fund,
Rf is risk free rate of return, and
Bi is 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.

2) 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,
Ri represents return on fund, and
Rf is risk free rate of return.

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

69
 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-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.

3) 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 fund1 given the level of its systematic risk. The
surplus between the two returns is called Alpha, which measures the performance of a
fund compared with the actual returns over the period. Required return of a fund at a
given level of risk (Bi) can be calculated as:

Ri = Rf + Bi (Rm - Rf)
Where,
Ri represents return on fund, and
Rm is average market return during the given period,
Rf is risk free rate of return, and
Bi is Beta deviation of the fund.

After calculating it, Alpha can be obtained by subtracting required return from
the actual return of the fund.

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.

70
4) 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 returns 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)

Where,
Ri represents return on fund,
Sm is standard deviation of market returns,
Rm is average market return during the given period, and
Rf is risk free rate of return.

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 is 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 diversify. Moreover, the selection of
the fund on the basis of superior stock selection ability of the fund manager will also

71
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.

KOTAK OPPORTUNITIES FUND

• Kotak opportunities is a open-ended equity Growth scheme.

• Kotak opportunities is a diversified aggressive equity scheme
• The fund has portfolio turnover ratio.
• The fund manager is optimistic on the markets in the long term and expects good
returns from the same.
• The fund manager is of the opinion that the market may not fall due to the abundent
liquidity in the system.However the fund managers sees high oil prices a big concern
in the global markets.
• The fund has invested into equities to the tune of 94.45% of the total portfolio.

RELIANCE EQUITY OPPORTUNITIES FUND:

• Reliance Equity Opportunities Fund is an Open-Ended Equity Scheme.

• Reliance Equity Opportunities Fund is an aggressive diversified equity scheme
• Reliance Equity Opportunities is to seek to generate capital appreciation and provide
long term growth opportunities by investing in a portfolio constituted of equity
securities and equity related securities.
• The fund has a high portfolio turnover ratio.
• It has Instrument type such as Equity & Equity related Instruments and Debt &
Money Market Instruments.

HDFC Core and Satellite Fund

• HDFC Core and Satellite Fund is an Open-Ended Equity Scheme.

• HDFC Core and Satellite Fund is an diversified equity scheme

72
• The Scheme may seek investment opportunity in the ADR / GDR / Foreign Equity
and Debt Securities, in accordance with guidelines stipulated in this regard by SEBI
and RBI from time to time.
• The net assets of the Scheme will be invested primarily in equity and equity related
instruments in a portfolio comprising of 'Core' group of companies and 'Satellite'
group of companies.
• The 'Satellite' group will comprise of predominantly small-mid cap companies that
offer higher potential returns but at the same time carry higher risk

FRANKLIN INDIA FLEXI CAP EQUITY FUND

• Franklin india flexi cap Fund is an Open-Ended Equity Scheme.

• Franklin india flexi cap Fund is an aggressive diversified equity scheme
• It is an investment avenue that has the potential to provide steady returns and
capital appreciation over a five-year period through a mix of fixed income and
equity instruments.
• It has a investment team has a rich experience of investing in both equity and fixed
income instrument that has translated in to a good investment performance from its
hybrid scheme

HSBC India opportunities Fund

• HSBC India Opportunities Fund is an Open-Ended Equity Scheme.

• It is a scheme seeking long term capital growth through investments across all
market capitalizations, including small, mid and large cap stocks.
• The investment is to seek aggressive growth by focussing on mid cap companies in
addition to investments in large cap stocks.
• The fund aims to be predominantly invested in equity and equity related securities

73
KOTAK OPPORTUNITIES FUND
Fund Manager: (Mr. Anand Shah)

OBJECTIVE:-
To generate capital appreciation from a diversified portfolio of equity and equity
related securities Kotak Opportunities is a diversified equity scheme, with a flexible
investing style. It will invest in sectors, which our Fund Manager believes would
outperform others in the short to medium-term. Kotak Opportunities’ specialty lies in
giving the Fund Manager flexibility to act based on his views on the market; and in
allowing him to invest higher concentrations in sectors he believes will outperform
others.
As markets evolve and grow, new opportunities for growth keep emerging. Kotak
Opportunities would endeavor to capture these opportunities to generate wealth for its
investors.

♦ KOTAK OPPORTUNITIES FUND PERFORMANCE:-

(Rm- (Rp- (X
YEAR Rp Rm Rf Rf) Rf) X2 XY -Xbar) D2

X Y D
LAST 1
MONTH 5.92 2.84 4.25 -1.41 1.67 1.98 -2.35 -20.11 404.71
LAST 3 13.1
MONTHS 24.61 1 4.25 8.86 20.36 78.49 180.38 -9.847 96.97
LAST 6 30.1
MONTHS 34.42 4 4.25 25.89 30.17 670.29 781.10 25.89 670.29
Since 45.9
Inception 78.17 9 4.5 41.49 73.67 1721.42 3056.56 22.78 519.04
125.8
TOTAL 74.83 7 2472.19 4015.70 18.70 1691.02
(Table-7)

Where,
Rp - Portfolio Return- Kotak opportunities
Rm - Market Return-Fund’s bench mark- S& P CNX 500

74
 Rf - Risk free rate of return.

• CALCULATION OF ARTHMETIC MEAN:-

=Σ X/N
= 74.83/ 4
= 18.70
• CALCULATION OF STANDARD DEVIATION (σ ):-
= √ Σ (X-Xbar) 2 / N
= √1691.02/4
=√422.75
=20.56
• CALCULATION OF BETA CO-EFFICIENT:-
= N (Σ XY) – Σ XΣ Y
N (Σ X2) – (Σ X) 2
= 4(5208.85) – (90.35)(126.21)
4(4117.22) – (90.35) 2
= 4(4015.70)-(74.83)-(125.87)
4(2472.19)-(74.83) 2
= 16062.8-9418.85
9888.76-5599
= 6643.95
4289.76
=1.54
• CALCULATION OF SHARPE’S RATIO:-
= Rp-Rf / σ
=125.87 /20.56
= 6.12
• CALCULATION OF TREYNOR’S RATIO:-
= Rp-Rf / β
= 125.87/1.54

75
 = 87.73/100
=0.8173
CHART-7 SHOWING KOTAK OPPORTUNITIES FUND PERFORMANCE:-

KOTAK OPPORTUNITIES

78.17
RETURNS

45.99

34.42
30.14
24.61

13.11
5.92 4.5
2.84 4.25 4.25 4.25

LAST 1 MONTH LAST 3 MONTHS LAST 6 MONTHS SINCE INCEPTION 09

SEPTEMBER-2008

Rf
KOTAK OPPORTUNITIES
S& P CNX-500

Interpretation:-

• Last I Month : It reveals that Kotak Opportunities Returns are 5.92

As compare to Funds Benchmark Returns are 2.84, and
The Risk Free Rate is common for next 9 months. (i.e., 4.25%)
• Last III Months: It reveals that Kotak Opportunities Returns are 24.61
As compare to Funds Benchmark Returns are 13.11, and
The Risk Free Rate is common for next 6 months. (i.e., 4.25%)
• Last VI Months: It reveals that Kotak Opportunities Returns are 34.42
As compare to Funds Benchmark Returns are 30.14, and
The Risk Free Rate is common for next 3 months. (i.e., 4.25%)
• Since Inception: It reveals that Kotak Opportunities Returns are 78.17,
As compare to Funds Benchmark Returns are 45.99, and

76
 There is a slight Increase in Risk Free Rate by 0.25% (i.e., 4.5%)
compare to last 9 Months.

HDFC CORE& SATELLITE FUND:

Objective:-
The objective of the scheme is to generate capital appreciation through equity
investment in companies whose shares are quoting at prices below their true value.

♦ HDFC CORE& SATELLITE FUND PERFORMANCE:-

(Rm- (Rp- (X
YEAR Rp Rm Rf Rf) Rf) X2 XY -Xbar) D2

X Y D
LAST -
1MONTH 1.15 3.72 4.25 -0.53 -3.1 0.2809 1.643 20.7925 432.3280563
LAST 3 13.8 12.2 -
MONTHS 16.46 2 4.25 9.57 1 91.5849 116.8497 10.6925 114.3295563
LAST 31.3
6MONTHS 35.6 31.1 4.25 26.85 5 720.9225 841.7475 26.85 720.9225
Since 49.6 65.1
Inception 69.64 6 4.5 45.16 4 2039.4256 2941.7224 24.8975 619.8855063
105.
TOTAL 81.05 6 2852.2139 3901.9626 20.2625 1887.465619

(Table-8)
Where,
Rp - Portfolio Return-HDFC core & Satellite Fund
Rm - Market Return-Fund’s benchmark-BSE-200
Rf - Risk free rate of return.

• CALCULATION OF ARTHMETIC MEAN:-

=Σ X/N
= 81.05/4
= 20.26
• CALCULATION OF STANDARD DEVIATION (σ):-
= √ Σ (X-Xbar)2 / N

77
 = √1887.4/4
= √471.75
=21.71

• CALCULATION OF BETA CO-EFFICIENT:-

= N (Σ XY) – Σ XΣ Y
N (Σ X2) – (Σ X) 2
= 4(3901.9) –(81.05)(105.6)
4(4026) – (89.75) 2
= 15607.5-8558.8
11408.8-6569.1
=7048.7
4839
=1.45

• CALCULATION OF SHARPE’S RATIO:-

=Rp-Rf-/ σ
=105.6/21.71
=4.86

• CALCULATION OF TREYNOR’S RATIO:-

= Rp-Rf/β
= 105.6/1.45
= 72.82/100
=0.7282

78
 CHART-8 SHOWING HDFC CORE& SATELLITE FUND PERFORMANCE

HDFC Core & Satellite Fund Performance

80
69.64
70

60
49.66
RETURNS

50

40 35.6
31.1
30

20 16.46
13.82

10
3.72 4.25 4.25 4.25 4.5
1.15
0
LAST 1 MONTH LAST 3 MONTHS LAST 6 MONTHS SINCE INCEPTION 17
SEPTEMBER-2008

Rp Rm RETURNS
Rf

Interpretation:

• Last I Month : It reveals that HDFC Core & Satellite Fund Returns are 1.15
as compare to Funds Benchmark Returns are 3.72, and The Risk
Free Rate is common for next 9 months. (i.e., 4.25%)
• Last III Months: It reveals that HDFC Core & Satellite Fund Returns are 16.46
as compare to Funds Benchmark Returns are 13.82, and The
Risk Free Rate is common for next 6 months. (i.e., 4.25%)
• Last VI Months: It reveals that HDFC Core & Satellite Fund Returns are 35.6,
as compare to Funds Benchmark Returns are 31.1 and The Risk
Free Rate is common for next 3 months. (i.e., 4.25%)
• Since Inception: It reveals that HDFC Core & Satellite Fund Returns are 69.64,

79
 as compare to Funds Benchmark Returns are 49.66, and There is
a slight increase in Risk Free Rate by 0.25%(4.5%) compare to
last 9 Months.

RELIANCE EQUITY OPPORTUNITIES FUND:

Investment Objective:

The primary investment objective of the scheme is to seek to generate capital

appreciation & provide long-term growth opportunities by investing in a portfolio
constituted of equity securities & equity related securities and the secondary
objective is to generate consistent returns by investing in debt and money market
securities.

♦ RELIANCE EQUITY OPPORTUNITIES FUND PERFORMANCE:-

(Rm- (Rp- (X
YEAR Rp Rm Rf Rf) Rf) X2 XY -Xbar) D2

X Y D
LAST 1
MONTH 2.4 3.72 4.25 -0.53 -1.85 0.2809 0.9805 -20.935 438.274225
LAST 3
MONTHS 16.22 13.82 4.25 9.57 11.97 91.5849 114.5529 9.57 91.5849
LAST 6
MONTHS 29.46 31.1 4.25 26.85 25.21 720.9225 676.8885 6.445 41.538025
Since
Inception 54.99 50.23 4.5 45.73 50.49 2091.2329 2308.9077 45.73 2091.2329

TOTAL 81.62 85.82 2904.0212 3101.3296 40.81 2662.63005

(Table-9)

Where,
Rp - Portfolio Return-Reliance equity opportunities fund

80
 Rm - Market Return-Fund’s Benchmark BSE-500
Rf - Risk free rate of return.

• CALCULATION OF ARTHMETIC MEAN:-

=Σ X/N
= 81.62/ 4
= 20.40
• CALCULATION OF STANDARD DEVIATION (σ):-
= √ Σ (X-Xbar)2 / N
= √2662.63/4
= √665.65
=25.80
• CALCULATION OF BETA CO-EFFICIENT;-
= N (Σ XY) – Σ XΣ Y
N (Σ X2) – (Σ X) 2
= 4(3101.32) – (81.62)(85.82)
4(2904.02) – (81.62) 2
= 12405-7002.91
11616-6661.82
=5402.09
4954.18
=1.09
• CALCULATION OF SHARPE’S RATIO:-
= Rp-Rf/ σ
=85.82
25.23
=7.29
• CALCULATION OF TREYNOR’S RATIO:-

81
 = Rp-Rf/β
= 85.82/1.47
= 37.32/100
=0.37

CHART-9 SHOWING RELIANCE EQUITY OPPORTUNITIES FUND

PERFORMANCE

RELIANCE EQUITY OPPORTUNITIES FUND

54.99
50.23
RETURNS

31.1
29.46
Rf

16.22
13.82

3.72 4.25 4.25 4.25 4.5

2.4

LAST 1MONTH LAST 3 MONTHS LAST 6 MONTHS SINCE INCEPTION 31 MARCH

2008

RELIANCEBSE-100

Interpretation:-
• Last I Month: It reveals that Reliance Equity Opportunities
Fund Returns are 2.4 as compare to Funds Benchmark Returns
Are 3.72, and The Risk Free Rate is common for next 9 months.
(i.e., 4.25%)
• Last III Months: It reveals that Reliance Equity Opportunities
Fund Returns are 16.22 as compare to Funds Benchmark Returns
are 13.82, and The Risk Free Rate is common for next 6 months.
(i.e., 4.25%)

82
 • Last VI Months: It reveals that Reliance Equity Opportunities
Fund Returns are 29.46 as compare to Funds Benchmark Returns
are 31.1 and The Risk Free Rate is common for next 3 months.
(i.e., 4.25%)
• Since Inception: It reveals that Reliance Equity Opportunities Fund Returns
are 54.99, as compare to Funds Benchmark returns are 50.23, and
There is a slight increase in Risk Free Rate by 0.25%(4.5%)
compare to last 9 months.

FRANKLIN INDIA FLEXI CAP EQUITY FUND

Fund Managers: (Mr. K N Siva Subramanian & R Sukumar Rajah)

Investment objective:
Stocks of companies are usually categorized as large-cap, midcap, and small-cap
depending on their market capitalization. History has demonstrated that these categories
tend to perform differently through economic and market cycles. For example, mid or
small cap stocks could move up sharply during a certain time period while large cap
stocks remain range bound and vice versa. On the other hand, large-cap stocks tend to be
less volatile than mid & small-cap stocks on account of factors such as size, market
leadership..etc. Moreover, such periods of out performance are typically followed by a
consolidation phase and a possible reversal of the situation. In order to derive optimal
returns from the stock markets, investments need to be diversified and have flexibility to
shift allocations across market caps.

Designed to help you achieve this with a single investment is Franklin India Flexi Cap
Fund (FIFCF). An open-end diversified equity fund, FIFCF seeks to provide medium to
long-term capital appreciation by investing in stocks across the entire market
capitalization range.

83
 ♦ FRANKLIN INDIA FLEXI CAP FUND PEFORMANCE:-

(Rm- (Rp- (X
YEAR Rp Rm Rf X2 XY D2
Rf) Rf) -Xbar)
X Y D
- -
LAST 1MONTH 3.47 3.72 4.25 -0.53 0.281 0.4134 438.274225
0.78 20.935
LAST 3 MONTHS 16.49 13.82 4.25 9.57 12.2 91.58 117.1368 10.1 102.01

LAST 6 MONTHS 36.58 31.1 4.25 26.9 32.3 720.9 868.0605 17.28 298.5984
SINCE INCEPTION
61.8 50.23 4.5 45.7 57.3 2091 2620.329 18.88 356.4544
March 2, 2005
TOTAL 81.6 101 2904 3605.9397 25.325 1195.337025

(Table-10)

Where,
Rp - Portfolio Return-Franklin flexi cap fund
Rm - Market Return-Fund’s Benchmarks S&P CNX-500
Rf - Risk free rate of return.

CALCULATION OF ARTHMETIC MEAN:-

=Σ X/N
= 81.6/ 4
= 20.4

84
CALCULATION OF STANDARD DEVIATION (σ):-
= √ Σ (X-Xbar)2 / N
= √1195/4
= √298.75
= 17.28

CALCULATION OF BETA CO-EFFICIENT;-

= N (Σ XY) – Σ XΣ Y
N (Σ X2) – (Σ X) 2
= 4(3605) – (81.6)(101)
4(2904) – (2904) 2
= 14420-8241.6
11616-8433
=6178.4
3183
=1.94
CALCULATION OF SHARPE’S RATIO:-
= Rp-Rf/ σ
=101
17.28
=5.84
CALCULATION OF TREYNOR’S RATIO:-
= Rp-Rf/β
=101/1.94
= 52.06/100 or 0.52

85
CHART-10 SHOWING FRANKLIN INDIA FLEXI CAP FUND PERFORMANCE:-

Franklin india flexi cap fund

70
61.8
60

50.23
50
RETURNS

40 36.58
31.1
30

20 16.49
13.82

10
3.47 3.72 4.25 4.25 4.25 4.5

0
SINCE INCEPTION March 2,
LAST 1MONTH LAST 3 MONTHS LAST 6 MONTHS
2008
Rf
Rp Rm

Interpretation:

• Last I Month : It reveals that Franklin India flexi Cap Fund Returns are 3.47 as
compare to Funds Benchmark Returns are 2.8, and The Risk Free
Rate is common for next 9 months. (i.e., 4.25%)

86
 • Last III Months: It reveals that Franklin India flexi Cap Fund Returns are
14.49 as compare to Funds Benchmark Returns are 13.11, and
The Risk Free Rate is common for next 6 months. (i.e., 4.25%)
• Last VI Months: It reveals that Birla Sun-life Equity Opportunities Fund
Returns are 36.58 as compare to Funds Benchmark Returns are
30.14 And the Risk Free Rate is common for next 3 months. (i.e.,
4.25%)
• Since Inception: It reveals that Birla Sun-life Equity Opportunities Fund
Returns are 61.8, as compare to Funds Benchmark Returns are
47.75 and There is a slight Increase in Risk Free Rate by
0.25%(4.5%) compare to last 9 months.
HSBC INDIA OPPORTUNITIES FUND
Fund Manager: (Mr.Sanjiv Duggal)

Investment objective:
The fund is an open-ended equity scheme seeking long term capital growth through
investments across all market capitalizations, including small, mid and large cap
stocks. The fund will endeavor to invest in large cap companies as well as identify
mid stocks, which have the potential to become blue chip large cap stocks over
time. The investment style is to seek aggressive growth by focusing on mid cap
companies in addition to investments in large cap stocks. This fund aims to be
predominantly invested in equity and equity related securities. However, it could
move a significant portion of its assets towards fixed income securities if the fund
becomes negative on negative on equity markets.

♦ HSBC INDIA OPPORTUNITIES FUND PEFORMANCE:-

(Rm- (Rp- (X
YEAR Rp Rm Rf Rf) Rf) X2 XY -Xbar) D2

X Y D
LAST 1
MONTH -0.57 2.81 4.25 -1.44 -4.82 2.0736 6.9408 -19.695 387.893025

87
LAST 3
MONTHS 12.45 13.45 4.25 9.2 8.2 84.64 75.44 9.15 83.7225
LAST 6
MONTHS 27.67 28.13 4.25 23.88 23.42 570.2544 559.2696 13.67 186.8689
Since
Inception 48.62 45.88 4.5 41.38 44.12 1712.3044 1825.6856 11.58 134.0964

TOTAL 73.02 70.92 2369.2724 2467.336 14.705 792.580825

(Table-11)
Where,
Rp - Portfolio Return-
Rm - Market Return,
Rf - Risk free rate of return.

• CALCULATION OF ARTHMETIC MEAN:-

=Σ X/N
= 73.02/ 4
= 18.25

• CALCULATION OF STANDARD DEVIATION (σ):-

= √ Σ (X-Xbar)2 / N
= √792.58/4
= √198.14
=14.07
• CALCULATION OF BETA CO-EFFICIENT;-
= N (Σ XY) – Σ XΣ Y
N (Σ X2) – (Σ X) 2
= 4(2467.33) – (73.02)(70.92)
4(2369.27) – (73.02) 2
= 9869.32-5178.57
9477.08-5331.92
=4690.75

88
 4145.18
=1.13
• CALCULATION OF SHARPE’S RATIO:-
= Rp-Rf/ σ
=70.92
14.07
=5.04
• CALCULATION OF TREYNOR’S RATIO: -
= Rp-Rf/β
=70.92/1.13
= 62.76/100
=0.62
CHART-11 SHOWING HSBC INDIA OPPORTUNITIES FUND
PEFORMANCE:-

H S B C IN D IA O P P O R T U N IT IE S

60

48 .62
50 4 5.8 8

40

30 27 .6 72 8.1 3
RETURNS

20
12 .4 51 3.4 5
10
4.2 5 4.25 4.25 4 .5
2 .8 1

0
1 /1/19 00 -0 .57
1 /2 /19 00 1/3 /19 0 0 1 /4 /1 900 1/5 /19 00 1 /6 /19 00

-10

H S B C B S E -5 00 R f

Interpretation
• Last I Month : It reveals that HSBC India Opportunities Fund Returns are
-0.57 as compare to Funds Benchmark Returns are 2.81, and The
Risk Free Rate is common for next 9 months. (i.e., 4.25%).

89
 • Last III Months: It reveals that HSBC India Opportunities Fund Returns are
12.45 as compare to Funds Benchmark Returns are 13.45, and
The Risk Free Rate is common for next 6 months. (i.e., 4.25%).
• Last VI Months: It reveals that that HSBC India Opportunities Fund
Returns
are 27.87 as compare to Funds Benchmark Returns are 28.13
and The Risk Free Rate is common for next 3 months. (i.e.,
4.25%)
• Since Inception: It reveals that HSBC India Opportunities Fund Returns
are 48.82, as compare to Funds Benchmark returns are 45.82, and
There is a slight Increase in Risk Free Rate by 0.25 % (4.5%)
compare to last 9 months

OBSERVATIONS;
Observations are made from the data analysis.

The following observations are drawn from the analysis of schemes:

KOTAK FRANKLIN RELIANCE HDFC HSBC

OPPORTUNITIES INDIA EQUITY CORE & INDIA
FUND FLEXI OPPORTUNITIE SATELLITE OPPORT-
CAP FUND S FUND UNITIES
FUND FUND

Monthly return’s
5.92 3.47 2.4 1.15 -0.57

Sharpe’s Ratio 6.12 5.84 7.29 4.86 5.04

Treynor’s Ratio 0.81 0.52 0.37 0.72 0.62

Co-efficient (β ) 1.54 1.94 1.09 1.45 1.13

Std.Deviation (σ ) 20.56 17.28 25.80 21.71 14.07

90
 (Table-12)

Chapter – 7
Conclusion and Recommendation

CONCLUSIONS
After interpreting the above data the following conclusions have been made

Kotak Opportunities Fund:

• It is a diversified aggressive equity fund.
• It is a open-ended equity scheme
• Since the β ratio is high it implies the risk is high
• As the returns are more in Kotak Opportunities compare to other Four AMC’s
• It is suitable for investors looking for medium risk and moderate returns with in a
time period of 1-3 years.

Franklin India Flexi Cap Fund:

• It is a diversified equity fund.
• It is a open-ended equity scheme
• Since the β ratio is high it implies the risk is high

91
 • In Franklin the returns are more compare to other Three AMC’s (HDFC,
RELIANCE, HSBC)

Reliance Equity Opportunities Growth Fund:

• It is a diversified equity fund.
• It is a open-ended equity scheme
• Since the β ratio is high it implies the risk is high
• In Reliance Equity Opportunities the returns are medium compare to other
AMC’s

HDFC Core & Satellite Fund:

• It is a diversified equity fund.

• It is a open-ended equity scheme
• In HDFC the returns are low compare to other AMC’s
• It is a value based fund
• It is a low risky fund

HSBC India Opportunities Fund:-

• It is a diversified equity fund.
• It is a open-ended equity scheme
• In HSBC the returns are lesser than other AMC’s
• It is a low risky fund

SUGGESTIONS:-

• The Asset Management Company must design the portfolio in such a way, to
increase the returns.
• The Asset Management Company must design the portfolio in such a way, to lessen
the risk that is common in the market.

92
• The Asset Management Company must dedicate itself, because it motivates the
investors and potential investors to invest in Mutual Funds.
• The Asset Management Company must manage the Fund efficiently and with
dedication to earn the goodwill of the public.
• The Asset Management Company must make the most advantageous use of print
and electronic media in order to motivate the investors and potential investors to
invest in Mutual Funds.

Chapter – 8

SUMMARY

The project’s idea is to project Mutual Fund as a better avenue for investment on a
long-term or short-term basis. Mutual Fund is a productive package for a lay-investor
with limited finances, this project creates an awareness that the Mutual Fund is a
worthy investment practice. Mutual Fund is a globally proven instrument. Mutual
Funds are ”Unit Trust” as it is called in some parts of the world has a long and
successful history, of late Mutual Funds have become a hot favorite of millions of
people all over the world.

The driving force of Mutual Funds is the ‘safety of the principal’ guaranteed, plus the
added advantage of capital appreciation together with the income earned in the form of
interest or dividend. The various schemes of Mutual Funds provide the investor with a
wide range of investment options according to his risk bearing capacities and interest
besides; they also give handy return to the investor. Mutual Funds offers an investor to
invest even a small amount of money, each Mutual Fund has a defined investment

93
objective and strategy. Mutual Funds schemes are managed by respective asset
managed companies sponsored by financial institutions, banks, private companies or
international firms. A Mutual Fund is the ideal investment vehicle for today’s complex
and modern financial scenario.

The study is basically made to analyze the various open-ended equity schemes of
different Asset Management Companies to highlight the diversity of investment that
Mutual Fund offer. Thus, through the study one would understand how a common man
could fruitfully convert a pittance into great penny by wisely investing into the right
scheme according to his risk taking abilities. The data is collected through websites,
various reviews, and journals. No primary data is involved; hence there is no sample
design. Further, mutual fund industry is discussed in detail, including evolution and
growth and future scenario of mutual fund industry.

94
Title of the Project:

COMPARATIVE STUDY BETWEEN MUTUAL FUNDS OFFER BY VARIOUS

COMPANIES IN INDIAN MARKET

Objective:

 To project Mutual Fund as the ‘productive avenue’ for investing activities.

 To show the wide range of investment options available in Mutual Funds by
explaining its various schemes.
 To compare the schemes based on Sharpe’s ratio, Treynor’s ratio, β Co-
efficient, Returns and show which scheme is best for the investor based on
his risk profile.
 To help an investor make a right choice of investment, while considering the
inherent risk factors.
• To understand the recent trends in Mutual Funds world.

Need for the Topic:

The project’s idea is to project Mutual Fund as a better avenue for investment on a
long-term or short-term basis. Mutual Fund is a productive package for a lay-investor
with limited finances, this project creates an awareness that the Mutual Fund is a
worthy investment practice. Mutual Fund is a globally proven instrument. Mutual
Funds are ”Unit Trust” as it is called in some parts of the world has a long and
successful history, of late Mutual Funds have become a hot favorite of millions of
people all over the world.

The driving force of Mutual Funds is the ‘safety of the principal’ guaranteed, plus the
added advantage of capital appreciation together with the income earned in the form of

95
interest or dividend. The various schemes of Mutual Funds provide the investor with a
wide range of investment options according to his risk bearing capacities and interest
besides; they also give handy return to the investor. Mutual Funds offers an investor to
invest even a small amount of money, each Mutual Fund has a defined investment
objective and strategy. Mutual Funds schemes are managed by respective asset
managed companies sponsored by financial institutions, banks, private companies or
international firms. A Mutual Fund is the ideal investment vehicle for today’s complex
and modern financial scenario.

The study is basically made to analyze the various open-ended equity schemes of
different Asset Management Companies to highlight the diversity of investment that
Mutual Fund offer. Thus, through the study one would understand how a common man
could fruitfully convert a pittance into great penny by wisely investing into the right
scheme according to his risk taking abilities.

Methodology and Procedure of Work:

The Methodology involves randomly selecting Open-Ended equity schemes of different

fund houses of the country. The research is on the COMPARATIVES STUDY
BETWEEN MUTUAL FUNDS OFFER BY VARIOUS COMPANIES IN INDIAN
MARKET. This research is secondary database oriented. Hence the research design
used is empirical research.
The data has been collected from various secondary sources like websites, various
reviews, and journals.

Statistical Technique to be used:

The scheme is analyzed according to its performance against the other, based on factors
like Sharpe’s Ratio, Treynor’s Ratio, β (Beta) Co-efficient, Returns.

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Chapterisation:
This dissertation consists of eight chapters, each chapter deals with different aspects of
this project.

The first chapter contains the introduction to the mutual fund industry in this dynamic
environment and the various schemes of mutual fund available for investment and
investor’s approach towards these schemes.

The second chapter deals with the way in which the study has been conducted. The
important topics of this chapter are objective of this study and the scope of the study.

The third chapter deals with the limitations of this study.

The fourth chapter deals with the theoretical perspective which include, Industry
Profile, Concept and Role of mutual fund, Various market players in Mutual Fund
market, Organization and Management of Mutual Funds, Investor’s Profile, Various
Mutual Fund Schemes, Advantages of Investing through Mutual Funds, Evolution &
Growth of Mutual Funds, Recent trends in Mutual Fund Industry and Risk Factors of
Mutual Fund.

The Fifth chapter deals with Methodology and Procedure of work.

The Sixth chapter deals with a detailed analysis of data.

The Seventh chapter deals with Conclusion and Recommendations

The final and eighth chapter contains Summary of the Project Report.

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 ANNEXURE II
REFERENCES

WEBSITES
• http://www.appuonline.com/mf/knowledge/industry.html
• http://finance.indiamart.com/markets/mutual_funds/
• http://business.mapsofindia.com/mutual-funds/
• http://www.mutualfundsindia.com/
• http://www.amfiindia.com/
• http://www.kotakmutual.com/
• http://www.reliancemutual.com/

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 • http://www.hdfcfund.com/
• http://www.investopedia.com/
• http://www.moneycontrol.com/mutualfundindia/
• http://www.valueresearchonline.com/
• http://myiris.com/mutual/
• http://www.njindiainvest.com/
• http://www.wikipidia.com/
• http://www.indiainfoline.com/

OTHER REFERENCES:
• Layman’s Guide to Mutual Funds By “OUTLOOK”
• Mutual Funds Primer By “ECONOMIC TIMES”
• MUTUAL FUND PRODUCT AND SERVICES---- TAXMAN
• Sarkar, A.K., 1991, “MUTUAL FUNDS IN INDIA : EMERGING
TRENDS”

ANNEXURE III
LIST OF CHARTS, FIGURES & TABLES

LIST OF CHARTS:

Chart – 1 Contribution of Various Players in Mutual Fund market in India...…………..15

Chart – 2 Growths in Assets under Management .............................................................54
Chart – 3 Asset Under Management..
…………………………………………………....57
Chart – 4 Growth rate of Indian Mutual Fund
Industry………………………………….57

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Chart – 5 GDP of Different Countries………...………………………………….…..….58
Chart – 6 Risk Hierarchy of different Mutual
Funds………………………………….....62
Chart – 7 Kotak Opportunities Fund Performance………………………………………76
Chart – 8 HDFC Core & Satellite Fund Performance …………………………….....….79
Chart – 9 Reliance Equity Opportunities Fund Performance…………………………....82
Chart – 10 Franklin India Flexi Cap Fund Performance………………………………...86
Chart – 11 HSBC India Opportunities Fund Performance ………………..…….………89

LIST OF FIGURES:

Figure – 1 Mutual Fund Operation Flow chart…………………………………………12

Figure – 2 Concept of Mutual Fund…………….………………………………..…….14
Figure – 3 Structure of Mutual Fund………………………………………………...…19
Figure – 4 Organization of Mutual Fund…………………………………..……...……20
Figure – 5 Broad Mutual Fund Types…………………………………..……...………33

LIST OF TABLES:

Table – 1 Asset Under Management (AUM)…………………………...…………18

Table – 2 Comparison of Investment Products..……………………………….…..29
Table – 3 Asset Allocation………….………………………………………..…….46
Table – 4 Fund Mobilization in Phase-II…………………………………..………51
Table – 5 Gross Fund Mobilization in Phase-III ………….…………………..…...53
Table – 6 Snapshot of Mutual Fund Schemes………………………………..…….63
Table– 7 Kotak Opportunities Fund Performance…………………………………74
Table– 8 HDFC Core & Satellite Fund Performance ………………………….....77
Table – 9 Reliance Equity Opportunities Fund Performance……………………....80
Table – 10 Franklin India Flexi Cap Fund Performance………..…………………...84
Table – 11 HSBC India Opportunities Fund Performance ………………..………...87
Table – 12 Observations from Analysis of Schemes…………………………..…….90

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