Financial Analysis of Selected Public Sector and Private Sector Mutual Funds
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Transcript of Financial Analysis of Selected Public Sector and Private Sector Mutual Funds
FINANCIAL ANALYSIS OF SELECTED PUBLIC
SECTOR AND PRIVATE SECTOR MUTUAL FUNDS
1. INRODUCTION
A mutual fund is a trust that pools the savings of a number of investors who
share a common financial goal. Anybody with an investable surplus of as
little as a few thousand rupees can invest in mutual funds. These investors
buy units of a particular mutual fund scheme that has a defined investment
objective and strategy. The money thus collected is then invested by the
fund manager in different types of securities. These could range from
shares to debentures to money market instruments, depending upon the
schemes shared by its unit holders in proportion to the number of units
owned by them. Thus, a mutual fund is the most suitable investment for
the common man as it offers an opportunity to invest in a diversified,
professionally managed basket of securities at a relatively low cost.
An open-ended fund or scheme is one that is available for subscription and
repurchase on a continuous basis. These schemes do not have a fixed maturity
period. Investors can conveniently buy and sell units at Net Asset Value (NAV)
related prices, which are declared on a daily basis. The key feature of open-end
scheme is liquidity.
A close-ended fund or scheme has a stipulated maturity period e.g. 5 – 7 years.
The fund is open for subscription only during a specified period at the time of
lunch of the scheme. Investors can invest in the scheme at the time of the initial
public issue and thereafter they can buy or sell the units of the listed. In order to
provide an exit route to the investors, some close-ended funds give an option of
selling back the units to the mutual fund through periodic repurchase at NAV
related prices. SEBI Regulation stipulates that at least one of the two exit routes is
provided to the investor i.e. either repurchase facility or through listing on stock
exchanges. These mutual funds schemes disclose NAV generally on weekly basis.
Interval scheme combines the features of open-ended schemes. They are open
for sale or redemption during predetermined intervals at NAV related prices.
The aim of income funds is to provide regular and steady income to investors.
Such schemes generally invest in fixed income securities such as bonds, corporate
debentures, government securities and money market instruments. Such funds
are less risky compared to equity schemes. These funds are not affected because
of fluctuations in equity market. However, opportunities of capital appreciation
are also limited in such funds. The NAV, of such funds are affected because of
change in interest rates in the country. IF the interest rates fall, NAVs of such are
likely to increase in the short run and vice versa. However, long-term investors
may not bother about these fluctuations.
The aim of growth funds is to provide capital appreciation over the medium to
long-term. Such schemes normally invest a major part of their corpus in equities.
Such funds have comparatively high risks. These provide different options to the
investors like dividend option, capital appreciation, etc.
1.1 MEANING OF MUTUAL FUND:
To state in simple words, a mutual fund collects the savings from small
investors, invest them in Government and other corporate securities and
earn income through interest and dividends, besides capital gains. It works
on the principle of ‘small drops of water makes a big ocean’. For instance,
if one has Rs. 1000 to invest, it may not fatch very much on its own. But,
when it is pooled with Rs. 1000 each from a lot of other people, then, one
could create a big fund large enough to invest in a wide varieties of shares
and debentures on a commanding scale and thus, to enjoy the economics
of large scale operations. Hence, a mutual fund is nothing but a form of
collective investment. It is formed by the coming together of a number of
investors who transfer their surplus funds to a professionally qualified
organisation to manage it. To get the surplus funds from investors, the
fund adopt a simple technique. Each fund is divided into a small fraction
called “units” of equal value. Each investor is allocated units in proportion
to the size of his investment. Thus, every investor, whether big or small,
will have a stake in the fund and can enjoy the wide portfolio of the
investment held by the fund. Hence, mutual funds enable millions of small
and large investors to participate in and derive the benefits of the capital
market growth. It has emerged as a popular vehicle of creation of wealth
due to high return, lower cost and diversified risk.
1.2 DEFINITIONS OF MUTUAL FUND:
The Securities and Exchange Board of India (Mutual Funds) Regulations,
1993 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’.
Kamm,J.O. defines an open end investment company as “an organisation
formed for the investment of funds obtained from individuals and
institutional investors who in exchange for the funds receive shares which
can be redeemed at any time at their underlying asset values.”
2. REVIEW OF LITERATURE:
2.1 RESEARCH ON MUTUAL FUNDS IN INDIA- A REVIEW
A key measure to accelerate development in any society is to raise the rate
of savings, which in turn finance additional investment in industry,
agriculture, service and human skills. By enabling small savers, to combine
safety with a higher return than they could have obtained from bank fixed
deposits or investment in gold or in any other asset. UTI played a significant
role in raising India’s saving rate, sawing the seeds of greater economic
growth.
There are some Indian studies which viewed UTI as a development financial
institution and also examined the role of UTI in providing finance to the
corporate and other sectors of economy.
A number of articles and brief essays have been published in financial
dailies, Periodicals and in many professional and research journals. The
available literature can be divided into five categories.
Informative and Descriptive
Performance Evaluation
Valuation and Pricing
Regulatory Issues
Managerial aspects
A brief review of literature is presented below.
A number of academics, professionals and business journals have
written articles explaining the basic concept of mutual funds, their
characteristics and reviewed the trends in the growth of mutual funds.
They also emphasized the importance of mutual funds in the
development of capital market in India.
Verma’s book on mutual funds covers the conceptual and regulatory
aspects of the Indian mutual funds with some informational data and
guidelines to the investors in selection of mutual funds.
S. Narayan Rao evaluated performance of Indian mutual funds in a bear
market through relative performance index, risk-return analysis,
Treynor’s ratio, Sharpe’s ratio, Sharpe’s measure, Jensen’ measure and
Fama’s measure. The study used 269 open-ended schemes( out of total
schemes of 433) for computing relative performance index. Then after
excluding funds whose returns are less than risk-free returns, 58
schemes are finally used for further analysis. The results of performance
measures suggest that most of mutual fund schemes in the sample of
58 were able to satisfy investor’s expectations by giving excess returns
over expected returns based on both premium for systematic risk and
total risk.
Bijan Roy concluded an empirical study on conditional performance of
Indian mutual funds. This paper uses a technique called conditional
performance evaluation on a sample of eighty-nine Indian mutual fund
schemes. This paper measures the performance of various mutual funds
with both-conditional and unconditional form of CAPM, Treynor-Mazuy
model and Henriksson-Merton model. The effect of incorporating lagged
information variables into the evaluation of mutual fund manager’s
performance is examined in the Indian context. The results suggest that
the use of conditioning lagged information variables improves the
performance of mutual fund schemes, causing alphas to shift towards
right and reducing the number of negative timing coefficients.
In 1987, when the public sector banks entered in the mutual fund
sector, there were no regulations at all. Later guidelines were issued by
RBI and the Government of India. A few articles highlighted the
importance and issues for the regulation of mutual fund. In 1993, SEBI
framed regulations for mutual funds.
Computation of the Net Asset Value(NAV) and the pricing of mutual fund
units are very important as there were no guidelines at all. A few articles
published in the financial dailies highlighted the importance of uniform
valuation of investment. Jaydev also critically analysed the desperate
practices of mutual funds in the valuation of investments. In January,
1996 SEBI Committee report of valuation andpricing was released which
suggest norms for the valuation and pricing.
A few articles touched upon certain aspects of portfolio management
and other issues involved in the management of mutual funds. The
notable among them are Sengupta, Lal and Sharma and Shah and
Murthy.
Ajay Shah and Susan Thomas studied the performance evaluation of 11
mutual fund schemes, on the basis of market price data. The weekly
returns were computed for these schemes since their commencement
to April, 1994. Jensen and sharpe measures were used to evaluate the
superior performance of the schemes. They concluded that except UGE-
2000 of UTI, none of the schemes earned superior returns then the
market is general. The risk of these schemes is very high and funds
might be inadequately diversified.
Jaideep and Sudip Majumdar (1994) evaluated the performance of five
growth oriented schemes for the period February 1991 to August 1993.
They have employed the CAPM and Jensen Measurement to evaluated
the performance. They have also evaluated the boom period
performance of the scheme during the first quarter of 1992 by
employing Jensen Model. They conclude that the selected mutual fund
schemes have not offered superior returns during the study period than
the market in general. However, they concluded that in the boom period
the fund performed well.
Kshama Fernandes (2003) evaluated index fund implementation in
India, In this paper, tracking error of index funds in India is measured.
The consistency and level of tracking errors obtained by some well-run
index fund suggests that it is possible to attain low levels of tracking
error under Indian conditions. At the same time, there do seem to be
periods where certain index funds appear to depart from the discipline
of indexation.
K. Pendarika studied construction of mutual fund portfolios, developed a
multi-criteria methodology and applied it to the Greek market of equity
mutual funds. The methodology is based on the combination of discrete
and continuous multi-criteria decision aid methods for mutual fund
selection and composition. UTADIS multi-criteria decision aid method is
employed to develop mutual fund’s performance models. Goal
programming model is employed to determine proportion of selected
mutual funds in the final portfolios.
A few articles also appeared in the financial dailies ( The Economic
Times, Financial Express, Business Standards ) and the periodicals
( Capital Market, Dalal Streets, Business Today, Money Life, Outlook
etc.) about the evaluation of mutual fund schemes by comparing the
changes in NAV and Market Price between the changes in stock market
indices. However, these analyses were purely for short period and
ignored the concept of risk.
3.1 RESEARCH ON MUTUAL FUND IN US
In the US, innumerable studies and paper work has been done for mutual
funds. The advanced research on Mutual Fund performance evaluation
contribution a lot to the wealth of knowledge, brief review of which is as
follow. The review has also helped the researchers in identifying research
gaps. The initial work on the US mutual funds was done by Wharten School
of finance and commerce (1962) for the period 1953 to 1958. The study
examined the issues relating to investment policy , performance , portfolio
turnover rate and impact of mutual funds trading activity on the stock
markets. The study concludes that, on an average, the funds had not
performed well than composite markets from which they select their
securities. There was no persistent relationship between the annual portfolio
turnover rates and the performance. Further, the fund’s net purchases have
considerably affected the price movement of individual stocks and, to a
lesser extent, the price movements of the markets. Friend and Vickers
(1965) evaluated the performance of mutual funds against the randomly
constructed portfolios. The study concludes that mutual funds on the whole
have not performed super to random portfolios.
Treynor (1965) devised a new method for rating management of investment
funds. He has suggested a new predictor of mutual fund performance one
that differs from virtually all those used previously by incorporating the
volatility of a fund’s return in a simple yet meaningful manner. In other
words, he developed a concept of fund performance which takes investment
risk into account and a measure for rating fund management performance
which he applied directly using a graphical technique, also developed for the
purpose.
Sharpe William F. (1966) suggested a measure for the evaluation of portfolio
performance, His study concludes that out of 34 funds selected, 19 had
outperformed the bench-mark in terms of total risk.
Michael C. Jensen (1968) derived a risk-adjusted measure of portfolio
performance (Jensen’s alpha) that estimates how much a manager’s
forcasting ability contributes to fund’s returns. He concludes that for the
sample of 115 mutual funds the managers were not able to forcast expenses
and fees. Friens, Blume and Crockeet (1970) compared the performance of
86 mutual funds with random portfolios. The study concludes that, mutual
funds did worse than the randomly selected portfolios in terms of total risk.
Further, the funds with low high turnover and the fund size has no impact on
the performance.
Risk adjusted performance evaluation is also made by Carlson (1970) and
SEC study (1971). The broad conclusions arrived by them are, that some of
the funds had outperformed the benchmarks, but there was no consistency
in performance.
John McDonald(1974) examined the relationship between the stated fund
objectives and their risk and return attributes. The study concludes than, on
an average the fund managers appeared to keep their portfolios within the
stated risk.
Norman E. Mains (1977) applied neutral risk adjusted performance measures
and conduct that approximately 60% of the funds ( out of 75) has larger net
returns adjusted for systematic risk. Kelmosky (1977) concludes that past
risk adjusted performance is not a good guide to future performance. As
indicated by Stateman (2000), the SADR of a fund portfolio is the excess
return of the portfolio over the return of the benchmark index, where the
portfolio is leveraged to have the benchmark index’s standard deviation.
Zakri Y.Bello (2005) matched a sample of socially responsible stock mutual
funds matched to randomly selected conventional funds of similar net assets
to investigate differences in characteristics of assets held, degree of
portfolio diversification and variable effects of diversification on
investment performance. The study found that socially responsible funds do
not differ significantly from conventional funds in terms of any of these
attributes. Moreover, the effect of diversification on investment performance
is not different between the two groups. Both groups underperformed the
Domini 400 Social Index and S & P 500 during the study period.
To conclude, the literature survey reveals that, on an average, mutual fund
managers are not able to offer higher returns than the unmanaged
portfolios. Further, their ability in stock selection and market timing is also
poor. The recent works indicate that fund managers are to earn higher
returns but they offset the expenses. Further, in the short period
Fund managers are able to offer superior returns. The implication of these
studies is that of markets are reasonable efficient.
3.NEED FOR THE STUDY OF MUTUAL FUNDS:
“All Progress is boon of inquiry. Doubt is often better than overconfidence for
it leads to inquiry and inquiry leads to invasion.”
-Hudson Maxim
There are a lot of investment avenues available today in the financial market
for an investor with an investable 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 trends.
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 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.
My study will give an overview of mutual funds – definition, types, benefits,
risks, limitations, history of mutual funds in India, latest trends, global
scenario and future prospects.
4. RESEARCH METHODOLOGY:
4.1 INTRODUCTION
A research methodology defines as what activity of research is, how to
proceed, how to carry the research work systematically. Research
Methodology is the study of how to perform scientific research.
In other words, research is the systematic and objective identification,
analyses, dissemination and use of information for the purpose of improving
decision making related to identification and solution of problems. The
success of any research depends on the methodology followed in the study.
The present study thoroughly attempts to follow the systematic and scientific
approach to understand the study.
2.1 MEANING OF RESEARCH
Research is a systematic activity directed towards discovery and the
development of an organized body of knowledge.
Scientific method or research in problem solving is an informal application or
problem, identification, hypothesis, formulation, observation, analyses and
conclusion.
Redman and Mory defines research as “a systematized effort to gain new
knowledge.”
2.2 INTRODUCTION TO THE STUDY AND PROBLEM IDENTIFICATION
Mutual funds are innovative and provide value addition in personal finance.
Problems occur when a choice has to be made from the large number of
mutual fund selection on the basis of performance and persistence. There is
very little research on the construction of mutual fund portfolio.
Individual, authors, associates and institution at national or international
level have done many research works on different problems and financial
aspects of the mutual funds. Several studies in profitability, liquidity, trend
etc. were also done. here also the researcher has tried to emphasize on , “
the financial analysis of selected public sector private sector mutual funds.”
2.3 OBJECTIVES OF THE STUDY
1. To give brief idea about the benefits available from Mutual Fund
Investment.
2. To give an idea of the types of schemes available.
3. To discuss about the market trends of Mutual Fund Investment.
4. To check the financial performance of selected public sector and private
sector mutual funds.
5. To assess the fund development pattern of selected mutual fund houses.
6. To analyse and find out which among private sector or public sector
Mutual fund gives higher return to corporate investors.
7. To give an idea about the regulation of mutual funds.
2.4 Hypothesis
H0 : There is no significant difference in financial performance of
selected public sector and private sector mutual funds.
Ha : There is significant difference in financial performance of selected
public sector and private sector mutual fund.
H0 : There is no any significant role of a particular scheme of selected
public sector Mutual Funds in the financial performance of Mutual
Fund as a whole.
Ha : There is a significant role of a particular scheme of selected
public sector Mutual Funds in financial performance of Mutual
Fund company as a whole.
2.5 NATURE OF RESEARCH WORK:
The research work will be “Analytical” in nature.
2.6 SAMPLE SELECTION
For the purpose of research study, various schemes are selected from the following
private sector and public sector mutual funds.
Name of the AMC Nature of ownership
Alliance Capital Asset Management (I) Private Limited Private foreign
Birla Sun Life Asset Management Company Limited Private Indian
Bank of Baroda Asset Management Company Limited Banks
Bank of India Asset Management Company Limited Banks
Cholamandalam Cazenove Asset Management Company
Limited
Private foreign
DSP Merrill Lynch Asset Management Company Limited Private foreign
Escorts Asset Management Limited Private Indian
GIC Asset Management Company Limited Institutions
IDBI Investment Management Company Limited Institutions
Indfund Management Limited Banks
ING Investment Asset Management Company Private
Limited
Private foreign
J M Capital Management Limited Private Indian
Kotak Mahindra Asset Management Company Limited Private Indian
Kothari Pioneer Asset Management Company Limited Private Indian
Jeevan Bima Sahayog Asset Management Company
Limited
Institutions
Morgan Stanley Asset Management Company Private
Limited
Private foreign
Punjab National Bank Asset Management Company
Limited
Banks
Reliance Capital Asset Management Company Limited Private Indian
State Bank of India Funds Management Limited Banks
Shriram Asset Management Company Limited Private Indian
Sundaram Newton Asset Management Company Limited Private foreign
Tata Asset Management Company Limited Private Indian
Credit Capital Asset Management Company Limited Private Indian
Templeton Asset Management (India) Private Limited Private foreign
Unit Trust of India Institutions
2.7 SOURCES OF DATA
The present study of the selected public sector and private sector mutual
funds is based on both primary and secondary data. The raw data for the
present analysis have been obtained from the fact sheet of mutual fund
industry, All India Mutual Fund Association Websites and NAV database. This
information is supplemented by various other journals. Other data will also
be collected by interviewing the executives and investors of these mutual
fund houses.
2.8 TIME PERIOD
For the purpose of studying financial performance of selected schemes of
selected public sector and private sector Mutual Funds, return for the period
of one year, three years and five years and ten years of those selected
schemes are taken into consideration.
2.9 SCOPE OF THE STUDY
The present study deals with the financial performance of selected public
sector and private sector mutual funds. The performance of various schemes
of selected public sector and private sector mutual funds are taken into
consideration.
In my project, the scope is limited to some prominent mutual funds only.
There are so many schemes in mutual fund industry like equity, income,
balance specialized (banking, infrastructure, pharmacy) funds, index fund
etc. But this study will be confined to selected schemes only.
2.8 CHAPTER PLANNING
Chapter 1 Introduction
Chapter 2 Research design
Chapter 3 Review of Literature
Chapter 4 Brief History of Mutual Fund Industry
Chapter 5 Analysis of Selected Mutual Funds
Chapter 6 Major Findings, Conclusion And Suggestions.
2.14 LIMITATIONS OF THE STUDY
Everyone has its own limitations, which restricts the use of that factor. The
same principle applies to this research work also. The major limitations of the
said study are as under.
1. The data given on different websites related to mutual funds even on
websites of RBI and SABI doesn’t match at times, perhaps due to
difference in timing of updation.
2. Performance Appraisal of all the schemes will not be possible because
of non-availability of sufficient data, that is why, few schemes have
been considered for the purpose of the study.[or] These are different
methods to measure the financial performance of any mutual fund, in
this connection views of experts differ from one another.
References
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1. Chandra, Prasanna, “The investment Game”, Tata Mc-Graw Hill Publishing, New Delhi.
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1. Agrawal, Aditya, (2009) , “Dow Not Out”, Outlook Money, New Delhi, p. 36.
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11. Michael, C. Jensen, (1945 – 1964) , “The Performance of Mutual Funds in the Period”, Journal of Finance , 23, No. 2, pp. 389 – 416.
12. Ms. Dalal, (2009) , “No Sunshine in Autumn”, Money Life, Mumbai, p.46.
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Websites:
1. www.amfiindia.com
2. www.iupindia.org
3. www.mutualfundsindia.com
4. www.rbi.com
5. www.sebi.com
6. www.uti.com
7. www.utimf.com
8. www.valuersearchonline.com