Project report

Comparison of Top Mutual Fund Houses With Kotak Mutual Fund

Submitted to: Submitted by:Mr. Rajesh Sharma Niti Gupta

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Acknowledgement

I express my sincere gratitude to my industry guide Mr. Rajesh Sharma, Manager Institutional Sales, Kotak Asset Management Co. Ltd. for his able guidance, continuous support and cooperation through out my project, without which present work would not be possible.

I would like to thank entire team of Kotak Mahindra Asset Management Co. Ltd. for their constant support and help in successful completion of my project.

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Executive Summary

If size is the measure of dominance, then the Indian mutual fund industry can now boast on that. With the total Asset Under Management (AUM) increasing from Rs. 1,01,565 Crores in Jan 2000 to Rs.3,68,73.22 Crores by May 2010 , according to the Association of Mutual Fund in India (AMFI), the industry’s growth has been nothing but exceptional. It has indeed come a long way from being a single player, single scheme (US-64) industry to having 34 players and more than 480 schemes.

What has driven the growth? Number of factors have contributed to the surge in the industry’s growth. First and foremost, a buoyant domestic economy coupled with a booming stock market has been one of the major divers of the growth in recent times particularly in the last five year. Another significant factor facilitating this growth has been a conducive regulatory regime, thanks to increased effort by SEBI to improve market surveillance and protect investor’s interests. Further, incentives, such as making dividend tax free in the hands of investors have also provided strong impetus to the growth.

The intention of the research was to study the Mutual Fund Industry in India and compare the top mutual fund houses with Kotak. This study begins with the general introduction of the Mutual Fund Industry. After that under each type of Mutual Fund Scheme, specific funds of the Mutual Funds are picked up and compared. At the end a detailed portfolio has been designed for individuals in different age – groups and risk class.

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Introduction

Purpose of the Project

This project provides better understanding to the reader by giving insights on Indian Mutual fund Industry through comparative analysis of different Asset Management Companies and their schemes in India . Comparative analysis of four major Mutual Funds of India has been done, namely

Kotak Mutual Fund Birla Sun Life Mutual Reliance Mutual Fund ICICI Prudential Mutual Fund

Objective of the Project

For every problem there is a research. As all the researches are based on some objectives my study is also based upon some objectives and these are as follows:

To give a holistic and a comprehensive view of mutual fund industry in India. Comparative study of returns given by various AMC Mutual funds on the basis of

parameters like Standard Deviation, Beta, Sharpe Ratio, Average Maturity, etc. To understand the risk profile of the customer. To design a suitable portfolio for individual’s belonging to different risk class.

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Proposed Methodology:

In broader perspective the whole project can be divided into three sections. Under SECTION I, on the basis of past and present the industry has been analyzed and based on which future outlook has been projected. This section covers following things:

i. Concept of Mutual Funds, its Advantages and Disadvantages.ii. Evolution of Mutual Funds in India.iii. Types of Mutual Funds.iv. Tools used to compare Performance.

SECTION II, focuses on the comparison between different Mutual Fund houses on the basis of different categories of Mutual Funds. Funds are compared on the parameters of risk and return.

SECTION III, comprises of the Portfolio’s designed for individuals in different age and risk categories. A Portfolio comprising of different Funds has been designed such that maximum returns are achieved with minimum risk.

Limitations:

The analysis is completely based on the past performance and not confirms the future performance.The research is based on secondary data collected from other sources like magazines, newspapers, and websites, etc.Reliability of sources could also be limitation for the project.

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Mutual Funds Concept

Individuals or Institutions when have surplus money, i.e. savings, would like to invest with the common and logical motive of growing money by getting returns on the investments. There are various avenues to park money towards fulfillment of objective of return on investment.

One can invest money either where u can get assured returns and hence the risk is low but returns also are low compared to the high risk investments.

The other way is through investing in shares i.e. equity market. Generally the returns on equity investments are higher than debt investment but risk also is higher. To get good returns one really needs to understand the economy and performance of companies where you are investing money. For a common man it may be cumbersome while managing own profession, job or business.

Hence, the concept of mutual has evolved to manage the funds i.e. on behalf of the investor; fund manager will be taking decisions to maximize the investor’s returns.

Mutual funds today represent perhaps the most appropriate opportunity for most small investors. As financial markets become more sophisticated and complex, investors need a financial intermediary who provides the required knowledge and professional expertise on successful investing. In a mutual fund, many investors contribute to form a common pool of money. This pool of money is invested in accordance with a stated objective. The ownership of the fund is thus joint or “mutual” the fund belongs 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 bears to the total amount of the fund.

A mutual fund uses the money collected from investors to buy those assets which are specifically permitted by its stated investment objective. Thus, a growth fund would buy mainly equity assets – ordinary shares, preference shares, warrants, etc. An income fund would buy debt instruments such as debentures and bonds. The fund’s assets are owned by the investors in the same proportion as their contribution of all investors put together. When an investor subscribes to the mutual fund, he becomes part owner of the funds assets. In India, a mutual fund is constituted as a trust and investors subscribe to the “units” of a scheme launched by the fund.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. The profits and losses are shared by the investors in proportion to their investments. Mutual funds normally come out with a number of schemes with different investments objectives which are launched from time to time. A mutual fund is required to be registered with

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Securities and Exchange Board of India which regulates securities markets before it can collect funds from public.

However, whether the investor gets funds shares or units is only a matter of legal distinction. In any case, a mutual fund shareholder or unit holder is a part owner of the fund’s assets. The term unit-holder includes the mutual fund account-holder or closed end fund shareholder. A unit holder in Unit Trust of India US-64 scheme is the same as a UTI Master Shareholder or an investor in an alliance.

Each share or unit that an investor holds needs to be assigned a value. Since the units held by investor evidence the ownership of the assets, the value of the total assets of the fund when divided by the total number of units issued by the mutual fund gives us the value of one unit. This is generally called the Net Asset Value (NAV) of one unit or one share. The value of an investor’s part ownership is the determined by the NAV of the number of units held.

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Advantages of Mutual Funds:

The rising popularity of mutual funds can be attributed to the various advantages it has over other forms of avenues of investing, particularly for the investor who has limited resources available in terms of capital and ability to carry out detailed research and market monitoring. The major advantages offered by mutual funds to all investors are:

Portfolio Diversification: Mutual Funds normally invest in a well-diversified portfolio of securities. Each investor in a fund is a part owner of all of the fund’s assets. This enables him to hold a diversified investment portfolio even with a small amount of investment, which would otherwise require big capital.

Professional Management: Even if an investor has a big amount of capital available to him, he benefits from professional management skills brought in by the fund in the management of the investor’s portfolio. The investment management skills, along with the needed research into available investment options, ensure a much better return than what an investor can manage on his own. Few investors have the skills and resources of their own to succeed in today’s fast moving, global and sophisticated markets.

Reduction/Diversification of Risk: An investor in a mutual fund acquires a diversified portfolio, no matter how small his investment. Diversification reduced the risk of loss, as compared to investing directly in one or two shares or debentures or other instruments. When an investor invests directly, all the risk of potential loss is his own. While investing in the pool of funds with other investors, any loss on one or two securities is also shared with other investors. This risk reduction is one of the most important benefits of a collective investment like mutual fund.

Reduction of transaction costs: What is true of risk is also true of the transaction costs. A direct investor bears all the cost of investing such as brokerage. or custody of securities. When going through a fund, he has the benefit of economies of scale; the funds pay lesser costs because of large volumes, a benefit passed on its investors.

Liquidity: Often, investors hold shares or bonds they cannot directly, easily and quickly sell. Investment in a mutual fund, on the other hand is more liquid. An investor can liquidate the investment by selling the units to the fund if it’s an open-end fund, or by selling the units in stock market if the fund is a closed-end fund, since closed end funds have to be listed on a stock exchange. In any case, the investor in a closed end fund receives the sale proceeds at the end of a period specified by the mutual fund or the stock exchange.

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Convenience and Flexibility: Mutual fund management companies offer many investor services that a direct market investor cannot get. Within the same fund family, investors can easily transfer/switch their holdings from one scheme to another. They can also invest or withdraw their money at regular investors in most open end schemes. Mutual fund investment process has been made further more convenient with the facility offered by funds for investors to buy or sell their units through the internet on a e-mail or using other communication means. The investors also get updated market information from the funds. The information about the schemes is also shared by the fund managers in a transparent manner, with all material facts required by regulators to be disclosed to the investors.

Safety: Mutual Fund industry is well regulated; all funds are registered with SEBI which lays down rules to protect the investors. Thus, investors also benefit from the safety of a regulated investment environment.

Disadvantages of Investing through Mutual Funds:

While the benefits of investing through mutual funds far outweigh the disadvantages, an investor and his advisor will do well to be aware of a few shortcomings of using the mutual fund as an investment vehicle.

No tailor – made portfolios: Investors who invest on their own portfolios of shares, bonds and other securities. Investing through funds means he delegates this decision to the fund managers. High-net-worth individuals or large corporate investors may find this to be a constraint in achieving their objectives. However, most mutual funds help investors overcome this constraint by offering families of schemes- a large number of different number of different schemes within the same fund. In each scheme there are various plans and options. An investors can choose from different investment schemes/ plans/ options and construct an investment portfolio that meets his investment objectives.

Managing a portfolio of funds: Availability of a large number of options from mutual funds can actually mean too much choice for the investor. He may gain need advice on how to select a fund to achieve his objectives, quite similar to the situation when he has to select individual shares or bonds to invest in. Fortunately, India now has a large number of AMFI registered and tested fund distributors and financial planners who are capable of guiding the investors.

Evolution of Mutual Funds in India

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Reserve Bank and the Government of India. The objective

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then was to attract the small investors and introduce them to market investments. Since ten, the history of mutual funds in India can be broadly divided into six distinct phases.

Phase 1- 1964-87: Growth of Unit Trust of India In 1963, UTI was established by an act of Parliament. As it was the only entity offering mutual funds in India, it was a monopoly. Operationally, UTI was set up by the Reserve Bank of India, but was later de-linked from the RBI. The first scheme, and for long one of the largest, launched by UTI was Unit Scheme 1964. UTI started innovating and offering different schemes to suit the needs of different classes investors. Unit Linked Insurance Plan (ULIP) was launched in 1971. Master share could be termed as the first diversified equity investment scheme in India. The first Indian offshore fund was launched in August 1986. During 1990s, UTI catered to the demand for income-oriented schemes by launching Monthly Income Schemes, a somewhat unusual mutual fund product offering “assured returns”.

Phase 2- 1987-1993: Entry of Public Sector Funds 1987 marked the entry of other public sector mutual funds. With the opening up of the economy, many public sector banks and financial institutions were allowed to establish mutual funds. State Bank of India established the first non-UTI mutual fund-SBI mutual fund – in November 1987. This was followed by Canbank mutual fund, Indian Bank of Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. These funds helped in enlarging the investor community and the investible funds. From 1987-88 to 1992-93, the assets under the management increased from Rs.6700 cr. to Rs.47,004 cr., nearly seen times.

Phase 3- 1993-1996: Emergence of Private Funds A new era in the mutual fund industry began in 1993 with the permission granted for the entry of private sector funds. This gave Indian investors a broader choice of ‘fund families’ and increasing competition to the existing public sector funds. Quite significantly, foreign fund management companies were also allowed to operate mutual funds, most of them coming into India through joint ventures with Indian promoters. These private funds have brought in with them the latest product innovations, investment management techniques and investor-servicing technology that make the Indian mutual fund industry today a vibrant and growing financial intermediary.During the year 1993-94, five private sector mutual funds launched their schemes followed by six others in 1994-95. Initially, mobilization of funds by the private mutual funds was slow. But, this segment of the fund industry began to witness much greater investor confidence in due course. One influencing factor was the development of SEBI’s regulatory framework for the Indian mutual fund industry. Yet another important factor has been the steadily improving performance of several fund houses. Investors in India now clearly saw the benefits of investing through mutual funds and became discerning and selective.

Phase 4- 1996-99: Growth and SEBI regulation

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Since 1996, the mutual fund industry in India saw tighter regulation and higher growth. It scaled new heights in terms of mobilization of funds and number of players. Deregulation and liberalization of the Indian economy had introduced competition and provided impetus to the growth of the industry. Finally, most investors – small or large – started showing interest in mutual funds. Measures were taken both by SEBI to protect the investor and by the government to enhance investors’ returns through tax benefits. A comprehensive set of regulation for all mutual funds operating in India was introduced with SEBI (Mutual Fund) Regulations, 1996. These regulations set uniform standards for all funds. The erstwhile UTI voluntarily adopted SEBI guidelines for its new schemes. Similarly, the budget of Union Government in 1999 took a big step in exempting all mutual fund dividends from income tax in hands of investors. Both the 1996 regulations and the 1999 Budget must be considered of historic importance, given their far-reaching impact on the fund industry.

Phase 5- 1999-2004: Emergence of a large and uniform industry The other major development in the fund industry has been the creation of a level playing field for all mutual funds operating in India. This happened in February 2003, when the UTI Act was repealed. Unit Trust of India no longer has a special legal status as a trust established by an Act of Parliament. Instead, it has also adopted the same structure as any other fund in India – a Trust and an Asset Management Company. UTI Mutual Fund is the present name of the erstwhile Unit Trust of India. While UTI functioned under a separate law of Indian parliament earlier, UTI Mutual Fund is now under the SEBI’s (Mutual Funds) Regulations, 1996 like all other mutual funds in India. UTI Mutual Fund is still the largest player in the Indian fund industry. All SEBI complaint schemes of the erstwhile UTI are under its charge. All new schemes offered by UTI Mutual Fund are SEBI approved. Other schemes (US 64, Assured Return Schemes) of erstwhile UTI have been placed with a special undertaking administered by the Government of India. These schemes are being gradually wound up.

The emergence of a uniform industry with the same structure, operations and regulations makes it easier for distributors and investors to deal with any fund house in India.

Phase 6- From 2004 onwards: Consolidation and Growth The industry has lately witnessed a spate of mergers and acquisitions, most recent ones being the acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund by Principal and PNB Mutual Fund by Principal. At the same time, more international players continue to enter India, including Fidelity, one of the largest funds in the world. The stage is set now for growth through consolidation and entry of new international and private sector players. As at the end of March 2006, there were 29 funds.

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Classification of Mutual Funds

There are many types of schemes of mutual funds available to the Indian investor. However, these different types of schemes can be grouped into three broad heads. Firstly, schemes are usually classified in accordance with their structure as closed-end or open-end. The distinction depends upon whether they give the investors the option to redeem and buy units at any time from the fund itself (open end) or whether the investors have to await a given maturity before they can redeem their units to the fund (closed-end).

Schemes can also be grouped in terms of whether the fund collect from investors any charges at the time of entry or exit or both, thus reducing the investible amount or the redemption proceeds. Funds/schemes that make these charges are classified as load funds, and funds schemes that do not make any of these charges are termed no-load funds.

In the USA, schemes are also classified as being tax-exempt or non-tax exempt, depending on whether they invest in securities that give tax-exempt returns or not. This classification is not used in India.

Open-end Vs. Closed-end Funds

An open-end fund is one that sells and repurchases units at all times. When the fund sells units, the investor buys them from the fund. When the investor redeems the units, the fund repurchases the units from the investor. An investor can buy units or redeem units from the fund itself at a price based on the net asset value (NAV) per unit. The number of units outstanding goes up or down every time the fund sells new units or repurchases existing units. In other words, the ‘unit capital’ of an open-end mutual fund is not fixed but variable. When sale of units exceed repurchase, the fund increases in size. When repurchase exceed sale, the fund shrinks.

In practice, an open-end fund is not obliged to keep selling new units at all times, though it has the obligation to repurchase units tendered by the investor. Many successful funds, if they cannot mange a larger fund without adversely affecting profitability, stop accepting further subscriptions from new investors after they reach a certain size. As indicated earlier, an open-end fund rarely denies its investors the facility to redeem existing units. However, there are some situations when redemption is not possible. For example, redemption is only possible after the investor’s cheque for initial subscription has cleared (or only after the specified redemption period for collection of funds), or until after any “lock-in period” specified by the fund is over.

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Unlike an open-end fund, the ‘unit capital’ of a closed -end fund is fixed, as it makes a one-time sale of a fixed number of units. After the offer closes, closed-end funds do not allow investors to buy or redeem units directly from the funds. However, to provide the much needed liquidity to investors, closed-end funds list on a stock exchange. Trading through a stock exchange enables investors to buy or sell units of a closed-end mutual fund from each other, through a stock broker, in the same fashion as buying or selling shares of a company. The fund’s unit may be traded at a discount or premium to NAV based on investor’s perception about the fund’s future performance and other market factors affecting the demand for or supply of the fund’s units. The number of outstanding units of a closed-end fund does not vary on account of trading in the fund’s units at the stock exchange. Sometimes, closed-end funds do offer “buy-back of fund shares/units”, thus offering another avenue for liquidity to closed-end fund investors. In India, SEBI regulations ensure that the closed end scheme investors are given at least one of the two exit avenues.

Load and No-load Funds

Marketing of a new mutual fund scheme involves initial expenses. These expenses may be recovered from the investors in different ways at different times. Three usual ways in which a fund’s marketing expenses may be recovered from the investors are:

1. At the time of investor’s entry into the fund/scheme, by deducting a specific amount from his contribution.

2. By charging the fund/scheme with a fixed amount each year, during a specified number of years.

3. At the time of investor’s exit from the fund/scheme, by deducting a specified amount from the redemption proceeds payable to the investor.

These charges imposed on the investors to cover distribution/sales/marketing expenses are often called ‘loads’. The load charged to the investor at the time of his entry into a scheme is called a “front load or entry load”. This is the first case above. The load amount charged to the scheme over a period of time is called a “deferred load”. This is the second case above. The load that the investor pays at the time of his exit is called a “back-end load or exit load”. This is the third case above. Some funds may also charge different amounts of loads to the investors, depending upon how many years the investor has stayed with the fund; the longer the investor stays with the fund less the amount of “exit load” he is charged. This is called “contingent deferred sales charge”.

When an investor buys units from the fund, the front-end load amount is deducted from the contribution/purchase amount paid by him to the distribution/sales/marketing expenses, only the remaining par of his contribution is available at the disposable of the fund for making investments. Similarly, exit loads are subtracted from the redemption proceeds before they are paid to the outgoing investor. If the sales charge is made on a deferred bias directly to the scheme, the amount of the load may not be apparent to the investor, as the scheme’s NAV would reflect the net amount after the deferred load.

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Funds that charge front-end, back-end or deferred loads are called load funds. Funds that make no such charges or loads for sales expenses are called no-load funds. In India, SEBI has defined a “load” as the one-time fee payable by the investor to allow the fund to meet initial issue expenses including brokers/agents/distributors commissions, advertising and marketing expenses. Expenses such as SEBI filing fees, or printing of offer documents and other forms or even bank charges related to new issue of scheme would be considered initial issue expenses.

Tax-exempt Vs. Non-tax-exempt Funds

Generally, when a fund invests in tax-exempt securities, it is called a tax-exempt fund. In USA for example, municipal bonds pay interest that is tax-free, while interest on corporate and other bonds is taxable. In India, any income received by the mutual fund is tax-free. After the 1999 Union Government Budget, all of dividend income received from any of the mutual funds is tax-free in the hands of the investor. However, funds other than open-end equity oriented funds have to pay a distribution tax, before distributing income to investors. In other words, open-end equity oriented mutual fund schemes are tax-exempt investment avenues, while other funds are taxable for distributable income. For the Indian mutual fund investor, both the dividends and long term gains from their mutual fund investments are currently tax-free. However, any short term capital gains arising out of repurchase of fund units (held for a period of less than 12) are taxable. Further, after the 2005 Union Budget, repurchase transaction under equity oriented schemes have been subjected to a Securities Transaction Tax (STT). All these tax considerations are important in the investment decision. Hence, classification of mutual from the taxability perspective has great significance for investors.

Mutual Fund Types

Funds are generally distinguished from each other by their investment objectives and types of securities they invest in. Accordingly, we can divide these funds in three different ways:

a) Broad Fund Types by Nature of Investments: Mutual funds may invest in equities, bonds or other fixed income securities, or short term money market securities. So we have Equity, Bond and Money Market or Liquid Funds. All these invest in financial assets. But there are funds that invest in physical assets. For example, there is Gold or other Precious Metal Funds and there are Real Estate Funds.

b) Broad Fund Types by Investment Objective: Investors and hence the mutual funds pursue different objectives while investing. Thus, Growth Funds invest for medium to long term capital appreciation. Income Funds invest to generate regular income, and less for capital appreciation. Value Funds infest in equities that are under-valued today, whose value will be unlocked in the future.

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c) Broad Fund Types by Risk Profile: The nature of a fund’s portfolio and its investment objective imply different levels of risk undertaken. Funds are, therefore, often grouped in order of risk. Thus, Equity funds have a greater risk of capita loss than a debt fund that seeks to protect the capital while looking for they income. Liquid Funds are exposed to less risk than even the Bond Funds, since they invest in short term fixed income securities, as compared to longer term portfolios of Bond funds.

What is Money Market?

The money market is a subsection of the fixed income market. We generally think of the term fixed income as being synonymous to bonds. In reality, a bond is just one type of fixed income security. The difference between the money market and the bond market is that the money market specializes in very short-term debt securities (debt that matures in less than one year). Money market investments are also called cash investments because of their short maturities. Money market securities are essentially IOUs issued by governments, financial institutions and large corporations. These instruments are very liquid and considered extra ordinary safe. Because they are extremely conservative, money market securities offer significantly lower returns than most other securities. One of the main differences between the money market and the stock market is that most money market securities trade in very high denominations. This limits access for the individual investor. Furthermore, the money market is a dealer market, which means that firms buy and sell securities in their own accounts, at their own risk. Compare this to the stock market where a broker receives commission to acts as an agent, while the investor takes the risk of holding the stock. Another characteristic of a dealer market is the lack of a central trading floor or exchange. Deals are transacted over the phone or through electronic systems. The easiest way for us to gain access to the money market is with a money market mutual find, or sometimes through a money market bank account. These accounts and funds pool together the assets of thousands of investors in order to buy the money market securities on their behalf. However, some money market instruments, like Treasury bills, may be purchased directly. Failing that, they can be acquired through other large financial institutions with direct access to these markets. There are several different instruments in the money market, offering different returns and different risks. Example: Treasury Bills, Certificate of Deposit, Commercial Paper etc.

Money Market/Liquid Funds

This is considered to be at the lowest rung in the order o risk level, liquid funds 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 instruments these funds invest in include Treasury Bills issued by governments, Certificates of Deposit issued by banks and Commercial Paper issued by companies.

The major strength of money market or liquid funds is liquidity and safety of the principal that the investors can normally expect from short-term investments. Through

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interest rate risk is present; the impact is low as the investment instruments maturities are short.

Gilt Funds

Gilt is government securities with medium to long term maturities, typically of over one year. In India, we have Government Securities or Gilt Funds that invest in government paper called dated securities. Since the issuer is the Government of India/States, these funds have little risk of default and hence offer better protection of principal. However, Gilt Securities, like all debt securities, face interest rate risk. Debt securities prices fall when interest rate levels increase.

Debt Funds (or Income Funds)

Debt instruments invest in debt instruments issued not only by governments, but also by private companies, banks and financial institutions and other entities such as infrastructure companies/utilities. By investing in debt these funds target low risk and stable income for the investor as their key objectives. However, as compared to the money market/ liquid funds, they do have a higher price fluctuation risk, since they invest in longer-term securities.

Debt funds are largely considered as Income funds as they invest primarily in fixed income generating debt instruments. They do not target capital appreciation but look for current income, and therefore distribute a substantial part of their surplus to investors. Income funds that target high returns can face more risks. Even within the broad category of debt investment, different investment objectives can be set.

a) Diversified Debt Funds: A debt fund invests in all available types of debt securities, issued by entities across all industries and sectors is a properly diversified debt fund. While debt fund offer high income and less risk than equity funds, investors need to recognize that debt securities are subject to risk of default by the issuer on payment of interest or principal. A diversified debt fund has the benefit of risk reduction through diversification. Hence a diversified debt is less risky than a narrow-focus fund that invests in debt securities of a particular sector or industry. In addition, all debt mutual funds lead to risk reduction for the individual investor as any losses by a debt issuer are shared by a large number of investors in the fund.

b) Focused Debt Funds: Some debt funds have a narrow focus, with less diversification in its investments. Examples include, sector, specialized and offshore debt funds. They have a substantial part of their portfolio invested in debt instruments and are therefore more income oriented and inherently less risky than equity funds. However, debt funds should not be automatically considered to be less risky than equity funds, as there have been relatively large defaults by

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issuers of debt and many funds have non-performing assets in their debt portfolios. Also the market value of debt securities will fluctuate more as Indian debt market witness more trading and interest rate volatility in the future. The central point to note is that these narrow focus funds have greater risk than diversified debt funds. Other examples of focused funds include those that invest only in Corporate Debentures and Bonds or only in Tax Free Infrastructure or Municipal Bonds.

c) High Yield Debt Funds: Usually, Debt Funds control the default risk by investing in securities issued by borrowers who are rated by credit rating agencies and are considered to be of “investment grade”. There are, High Yield Debt Funds that seek to obtain higher interest returns by investing in debt instruments that are considered to be “below investment grade”. Clearly, these funds are exposed to higher default risk.

d) Assured Return Funds- an Indian Variant: Fundamentally, mutual funds hold assets in trust for investors. All returns and risks are assumed by the investor. The role of the fund manager is to provide professional management service and to ensure the most favorable risk-return profile consistent with the investment objective of the fund. The fund manager, the trustees or the sponsors do not guarantee minimum return to the investors.

However, in India, historically, UTI and other funds had offered “assured return” schemes to investors. The most popular variant of such schemes was the Monthly Income Plans of UTI. Returns were indicated in advance for all of future years of these closed-end schemes. In assured return schemes the shortfall, if any, is borne by the sponsors/AMCs. Assured Return or Guaranteed Monthly Income Plans are essentially Debt/Income Funds. Assured return debt funds certainly reduce the risk to the investor as compared to all other debt or equity funds, but only to the extent that the guarantor has the require financial strength. Hence, the market regulator SEBI permits only those funds whose sponsors have adequate net-worth to offer assurance of returns.

Assured return schemes are no longer offered by AMCs, though possible.

e) Fixed Term Plan Series-Another Indian Variant: Fixed Term Plan Series offer a combination of both open-end and closed-end schemes to its investors, as a series of plans are offered and units are issued at frequent intervals for short plan durations. Fixed Term Plans are essentially closed-end in nature; in that mutual fund AMC issues a fixed number of units for each series only once and closes the issue after an initial offering period, like a closed-end scheme offering. However, a closed end scheme would normally make a one time initial offering of units, for a fixed duration generally exceeding one year. Investors have to hold the units until the end of the stated duration, or sell them on a stock exchange if

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listed. Fixed Term Plans are closed-end, but usually for shorter term-less than a year. Being of short duration, they are not listed on a stock exchange.

The scheme under which Fixed Term Plan Series are offered is likely to be an Income Scheme, since the objective is clearly for the AMC to attempt to reward investors with an expected return within a short period. Mutual Fund AMCs in India usually offering such plans do not guarantee any returns, but the product has clearly been designed to attract the short term investor who would otherwise place the money as fixed term bank deposits or inter-corporate deposits.

Equity Funds

Equity funds invest a major portion of their corpus in equity shares issued by companies, acquired directly in initial public offerings or through the secondary market. Equity funds would be exposed to the equity price fluctuation risk at the market level, at the industry or sector level and at the company-specific level. Equity funds Net Asset Values fluctuate with all these price movements. These price movements are caused by several external factors-political, social as well as economic. The issuers of equity shares offer no guaranteed repayment as in case of debt instruments. Hence, Equity Funds are generally considered at the higher end of the risk spectrum among all funds available in the market. On the other hand, unlike debt instruments that offer fixed amount of repayment, equities can appreciate in value in line with issuer’s earnings potential, and so offer greatest potential for growth in capital.

Equity funds adopt different investment strategies resulting in different levels of risk. Hence, they are generally separated into different types in terms of their investment styles.

a) Aggressive Growth Funds: There are many types of stocks available in the market-market leaders, less researched stocks that are considered to have future growth potential, and even some speculative stocks of somewhat unknown or unproven issuers. Fund managers seek out and invest in different types of stocks in line with their own perception of potential returns and appetite for risk.

b) Growth Funds: Growth funds invest in companies whose earnings are expected to rise at an above average rate. These companies may be operating in sectors like technology considered having a growth potential, but not entirely unproven and speculative. The primary objective of Growth Funds is capital appreciation over a three to five years span. Growth funds are therefore less volatile than funds that target aggressive growth.

c) Specialty Funds: These funds have a narrow portfolio orientation and invest in only companies that meet pre-defined criteria. Within the Specialty Funds category, some funds may be broad based in terms of types of investments in the portfolio. However, most specialty funds tend to be concentrated funds,

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since diversification is limited to one type of investment. Clearly, concentrated specialty funds tend to be more volatile than diversified funds.

Sector Funds: Their portfolio consists of investments in only one industry or sector of the market such as Information Technology, Pharmaceuticals or Fast Moving Consumer Goods. Since sector funds do not diversify into multiple sectors, they carry a high level of sector and company specific risk than diversified equity funds.

Foreign Securities Funds: These funds invest in equities in one or more foreign countries thereby achieving diversification across the country’s borders. However, they also have additional risks such as the foreign exchange rate risk and their performance depends on the economic conditions of the countries they invest in. foreign securities Equity Funds may invest in a single country or many countries.

Mid-Cap or Small-Cap Equity Funds: These funds invest in shares of companies with relatively lower market capitalization than that of big, blue chip companies. They may be thus more volatile than other funds, as mid size or smaller companies shares are not very liquid in the markets. In terms of risk characteristics small company funds may be aggressive-growth or just growth type.

Option Income Funds: These funds do not exist in India, but Option Income Funds write options on a significant part of their portfolio. While options are viewed as risky instruments, they may actually help to control volatility, if properly used. Conservative option funds invest in large, dividend paying companies, and sell options against their stock positions. This ensures a stable income stream in the form of premium income through selling options and dividends.

d) Diversified Equity Funds: A fund that seeks to invest only in equities, except for a very small portion in liquid money market securities, but is not focused on any one or a few sectors or shares, may be termed a diversified equity fund. While exposed to all equity price risks, diversified equity fund seeks to reduce the sector or stock specific risks through diversification. They have exposure to equity market risk. Such general purpose diversified funds are at a lower risk level than growth funds.

Equity Linked Savings Schemes: In India, investors have been given tax concessions to encourage them to invest in

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equity markets through these special schemes. Investment in these schemes entitles the investor to claim an income tax rebate., but usually has a lock-in period. There are no restrictions on the investment objectives for fund managers. Investors should clearly look for where the Fund Management Company proposes to invest and accordingly judge the level of risk involved.

e) Equity Index Fund: An index fund tracks the performance of a specific stock market index. The objective is to match the performance of the stock market by tracking an index that represents the overall market. The fund invests in shares that constitute the index and in the same proportion as the index. These funds take only the overall market risk, while reducing the sector and stock specific risks through diversification. However, there are index funds that track a narrow sect oral index, such as Parma Index or Bank Index. These will be less diversified and more risky, although they will be less risky compared to individual stocks in that industry/sector.

f) Value Funds: Value funds try to seek out fundamentally sound companies whose shares are currently under priced in the market. Value funds will add only those shares to their portfolio that are selling at low price-earning ratios, low market to book value ratios and are believed to be undervalued compared to their true potential. Value Funds take equity market risks, but stand often at a lower end of the risk spectrum in comparison with the Growth funds. Value Stocks may be from a large number of sectors and therefore diversified. However, value stocks often come from cyclical industries. Example Templeton Fund which has in its portfolio shares of Cement/Aluminum and other cyclical industries. Prices of such shares may fluctuate more than the overall marketing both bull and bear markets, making such value funds more risky than diversified funds in the short-term. However, proponents of the value investing recommend it as a long term approach. In the long term, value Funds ought to be less risky than Growth Funds or even Equity diversified funds.

g) Equity Income or Dividend Yield Funds: There are some equity funds that can be designed to give the investor a high level of current income along with steady capital appreciation, investing mainly in shares of companies with high dividend yields. As an example, an Equity Income Fund would invest largely in Power/Utility companies, shares of established companies that pay higher dividends and whose prices do not fluctuate as much as other shares. These equity funds should therefore be less volatile and less risky than nearly all other equity funds.

Hybrid Funds – Quasi Equity/Quasi Debt

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In terms of the nature of financial securities held, there are three major mutual fund types: money market, debt and equity. Many mutual funds mix these different types of securities in their portfolios. Thus, most funds, equity or debt, always have some money market securities in their portfolios as these securities offer the much needed liquidity. However, money market holdings will constitute a lower proportion in the overall portfolios of debt or equity funds. These are funds that, however, seek to have a relatively balanced holding of debt and equity securities in their portfolios. Such funds are termed “hybrid funds” as they have a dual equity – bond focus. Some of the funds in this category are:

a) Balanced Funds: A balanced fund is one that has a portfolio comprising debt instruments, convertible securities, and preference and equity shares. Their assets are generally held in more or less equal proportions between debt/money market securities and equities. By investing in a mix of this nature, balanced funds seek to attain the objectives of income, moderate capital appreciation and preservation of capital, and are ideal for investors with a conservative ad long-term orientation.

b) Growth and Income Funds: Unlike income-focused r growth-focused funds, these funds seek to strike a balance between capital appreciation and income for the investor. Their portfolios are a mix between companies with good dividend paying records and those with potential for capital appreciation. These funds would be less risky than pure growth funds, though more risky than income funds.

c) Asset Allocation Funds: These are the funds that follow variable asset allocation policies and move in and out of an asset class (equity, debt, money market etc.) Depending upon their outlook for specific markets. The fund manager is given the flexibility to shift towards equity when equity market is expected to do well and to shift towards debt when the debt market is expected to do well. The success of such strategy would depend on the skill of the f und manager in anticipating market trends.

Commodity Funds

Commodity funds specialize in investing in different commodities directly or through shares of commodity companies or through commodity futures contract. Specialized funds may invest in a single commodity or a commodity group such as edible oils or grains, while diversified commodity funds will spread their assets over many commodities.

A most common example of commodity funds is the so called Precious Metals Funds. Gold Funds invest in gold, gold futures or shares of gold mines. Other precious metal funds such as Platinum or Silver are also available. They may take exposure to more than one metal to get some benefit of diversification.

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Real Estate Funds

Real Estate Funds would invest in real estate directly, or many fund real estate developers, or lend to them, or buy shares of housing finance companies or may even buy their securitized assets. The fund may have a growth orientation or may seek to give investors regular income.

Exchange Traded Fund (ETF)

An ETF is a mutual fund scheme, which combines the best features of open end and closed end structures. It tracks a market index and trades like a single stock on the Stock Exchange. Its pricing is linked to the index and units can be bought/sold on the Stock Exchange. ETF offers investor the benefit of flexibility of holding a single share as well as the diversification and cost efficiency of an index. ETFs trade on the stock exchanges and thus its unit price is determined in the market place and will keep changing from time to time. ETFs are bought and sold through intermediaries who are generally market makers-buying and selling units with two way price quotes. These market makers allow investors to exchange ETF units for underlying shares.

Funds of Funds

A fund of funds invests in other mutual funds. As a normal mutual fund invests in a portfolio of securities such as debt or equity, a fund of funds invests in a portfolio of the units of other mutual fund schemes. Availability of a fund of funds to an investor helps the investor diversify his risk not only in terms of the types of securities held in the portfolio, but also in terms of schemes of different fund managers and investment styles. A fund of funds can invest in top performing equity funds of different AMCs and offer the most widely diversified portfolio to the investor. It can also invest in equity and income schemes of other AMCs simultaneously offering the investor balanced or diversified portfolio across asset classes. A fund of funds could, however, result in higher expenses of the AMC that manages the fund of funds get added to the expenses of the other schemes it invests in.

Fund Structure and Constituents

In India, open-end and closed-end funds are constituted along one unique structure as unit trusts. A mutual fund in India is allowed to issue open-end and closed-end schemes under a common legal structure. Therefore, a mutual fund may have several different schemes under it i.e., under one unit trust, at any point of time. However, like the USA all the funds and their open end and closed end schemes are governed by the same regulations and the regulatory body, the SEBI. The structure that is required to be followed by mutual funds in India is laid down under SEBI Regulations, 1996. The structure of the various fund constituents is:

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Fund Sponsor: Sponsor is defined under SEBI regulations as any person who, acting alone or in combination with another body corporate, establishes a mutual fund. The sponsor of a fund is akin to the promoter of a company as he gets the fund registered with SEBI. The sponsor will form a trust and appoint a board of Trustees. The sponsor will also generally appoint an Asset Management Company as fund managers. The sponsor, either directly or acting through the trustees will also appoint a Custodian to hold the fund assets. All these appointments are made in accordance with SEBI Regulations. As per the existing SEBI regulations, for a person to qualify as a sponsor, he must contribute at least 40% of the net worth of the AMC and possess a sound financial track record over five years prior to registration.

Mutual Fund as Trusts

A mutual fund in India is constituted in the form of a Public Trust created under the Indian Trusts Act, 1882. The Fund Sponsor acts as the Settler of the Trust, contributing to its initial capital, and appoints a Trustee to hold the assets of the Trust for the benefit of the unit-holders, who are the beneficiaries of the Trust. The fund then invites investors to contribute their money in the common pool, by subscribing to “units” issued by various schemes established by the trust, units being the evidence of their beneficial interest in the fund.

Under the Indian Trusts Act, the Trust or the Fund has no legal capacity itself, rather it is the Trustee or Trustees who have legal capacity and therefore all acts in relation to the trust are taken on its behalf by the Trustees. The Trustees hold the unit-holders money in a fiduciary capacity i.e. the money belongs to the unit-holders and is entrusted to the fund for the purpose of investment. In legal parlance, the investors or the unit-holders are the “beneficial owners” of the investment held by the Trust, even as these investments are held in the name of the trustees on a day-to-day basis. Being Public Trusts, mutual funds can invite any number of investors as beneficial owners in their investment schemes.

Trustees

The trust-the mutual fund may be managed by a Board of Trustees-a body of individuals, or a Trust Company- a corporate body. Most of the funds in India are managed by board of Trustees. While the Board of Trustees is governed by the provisions of Indian Trusts Act, where the trustees is a corporate body, it would be required to comply with the provisions of the, Companies Act, 1956. The board or the Trustee Company, acts as an independent body and as a protector of the unit holders interests. The Trustees do not directly manage the portfolio of securities. For this specialist function, they appoint an Asset Management Company. They ensure that the fund is managed by the AMC as per the defined objectives and in accordance with the Trust Deed and SEBI regulations.

The Trust is created through a document called the Trust Deed that is executed by the Fund Sponsor in favor of the Trustees. The Trust Deed is required to be stamped as registered under the provisions of the Indian Registration Act and registered with SEBI. The trustees being the primary guardians of the unit-holder’s funds and assets, a Trustee

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has to be a person of high repute and integrity. SEBI has laid down a set of conditions to be fulfilled by the individuals being proposed as trustees of mutual funds- both independent and non-independent. Besides specifying the “disqualifications”, SEBI has also set down the Rights and Obligations pf the Trustees. Broadly, the Trustees must ensure that investor’s interests are safeguarded and that AMCs operations are along professional lines. They must also ensure that the management of the fund is in accordance with SEBI Regulations. To ensure the independence of the Trustee Company, SEBI mandates a minimum of two-third independent directors on the board of Trustee Company.

The Asset Management Company-Appointment and Functions

The role of an AMC is to act as the Investment Manager of the Trust. The sponsors, or the trustees, if so authorized by the Trust Deed, appoint the Acute AMC so appointed is required to be approved by SEBI. Once approved, the AMC functions under the supervision of its own Board of Directors, and also under the direction of the Trustees and SEBI. The Trustees are empowered to terminate the appointment of the AMC and appoint a new AMC with the prior approval of SEBI and unit –holders. The AMC would, in the name of the Trust, float and then manage the different investment “schemes” as per SEBI Regulations and as per the Investment Management Agreement it signs with the Trustees.

The AMC of the mutual fund must have a net worth of at least Rs.10 Crores at all times. Directors of the AMC, both independent and non-independent, should have adequate professional experience in financial services and should be individuals of high moral standing, a condition also applicable to other key personnel of the AMC. The AMC cannot act as a trustee of any other mutual fund. Besides its role as the fund manager, it may undertake specified activities such as advisory services and financial consulting, provided these activities are run independently of one another and the AMCs resources are properly segregated by activity. The AMC used always act in interest of the unit-holders and report to the trustees with respect to its activities. To ensure the independence of the asset management company, SEBI mandates that a minimum of 50% of the directors of the board of the asset management company should be independent directors.

Custodian and Depositories

Mutual funds are in the business of buying and selling of securities in large volumes. Handling these securities in terms of physical delivery and eventual safekeeping is therefore a specialized activity. The custodian is appointed by the Board of Trustees for safekeeping of physical securities or participating in any clearing system through approved depository companies on behalf of the mutual fund in case of dematerialized securities. A custodian must fulfill its responsibilities in accordance with its agreement with the mutual fund. The custodian should be an entity independent of the sponsors and is required to be registered with SEBI.

Bankers

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A fund’s activities involve dealing with money on a continuous basis primarily with respect to buying and selling units, paying for investment made, receiving the proceeds on sale of investments and discharging its obligations towards operating expenses. A fund’s bankers, therefore, play a crucial role with respect to its financial dealings by holding its bank accounts and providing it with remittance services.

Registrars and Transfer Agents

Registrars and transfer Agents are responsible for issuing and redeeming units of the mutual fund and providing other related services such as preparation of transfer documents and updating investor records. A fund may choose to carry out this activity in-house and charge the scheme for the service at a competitive market rate. Where an outside Transfer Agent is used, the fund investor will find the transfer agent to be an important interface to deal with, since all of the investor services that a fund provides are going to be dependent on the transfer agent. Such services include buying/repurchase of units, switching from one scheme to another, systematic investment/ withdrawals, recording of nomination & bank detail.

Distributors

Mutual funds operate as collective investment vehicles, on the principles of accumulating funds from a large number of investor and then investing on a big scale. For a fund to sell units across a wide retail base of individuals’ investors, an established network of distribution is essential. In terms of numbers, individuals constitute the largest segment in the category of mutual fund distributors. Other distributors such as banks, non banking finance.

Companies account for bulk of the volume of business. Banks are now emerging as a significant distribution vehicle for mutual funds.

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Tools

1. Standard Deviation: In probability theory and statistics, standard deviation is a measure of the variability or dispersion of a population, a data set, or a probability distribution. A low standard deviation indicates that the data points tend to be very close to the same value (the mean), while high standard deviation indicates that the data are spread out over a large range of values.

In finance, standard deviation is a representation of the risk associated with a given security (stocks, bonds, property, etc.), or the risk of a portfolio of securities (actively managed mutual funds, index mutual funds, or ETFs). Risk is an important factor in determining how to efficiently manage a portfolio of investments because it determines the variation in returns on the assets and/or portfolio and gives investors a mathematical basis for investment decisions (known as mean-variance optimization).

The overall concept of risk is that as it increases, the expected return on the asset will increase as a result of the premium earned-in other words, investors should expect a higher return on an investment when said investment carries a higher level of risk, or uncertainty of that return. When evaluating investments, investors should estimate both the expected return and the uncertainty of future returns. Standard deviation provides a quantified estimate of the uncertainty of future returns

2. Sharpe Ratio: A ratio developed by Nobel Laureate Bill Sharpe to measure risk-adjusted performance. Sharpe ratio is a bit of a blunt instrument for measuring risk adjusted returns. Past returns don’t predict future returns. And although relative risks among funds have a good deal of consistency overtime, standard deviation only a rough proxy for a concept as elusive as risk. Further, weighting risk as equal to return in importance in the formula is completely arbitrary. Since Sharpe Ratio uses standard deviation as a measure of risk, it evaluates returns with respect to total risk, not just the market (systematic) risk. Therefore, it can be used even for non diversified portfolios (which would have both systematic risks as well as non systematic risk). It is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.

The Sharpe ratio tells us whether the returns of a portfolio are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much

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

A variation of the Sharpe ratio is the Sorption ratio, which removes the effects of upward price movements on standard deviation to instead measure only returns against downward price volatility.

Let Rf represent the return on fund F in the forthcoming period and RB the return on a benchmark portfolio or security. In the equations, the tildes over the variables indicate that the exact values may not be known in advance.

3. Beta: Beta is a measure of a stock’s volatility in relation to the market. By definition, the market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a beta above 1.0. if a stock moves less than the market, the stock’s beta is less than 1.0. High-beta stocks are supposed to be riskier but provide a potential for higher returns; low-beta stocks pose less risk but also lower returns.

Beta is a key component for the capital asset pricing model (CAPM), which is used to calculate cost of equity. The cost of capital represents the discount rate used to arrive at the present value of a company’s future cash flows. All things being equal, the higher a company’s beta is, the higher its cost of capital discount rate. The higher the discount rate, the lower the present value placed on the company’s future cash flows. In short, beta can impact a company’s share valuation.

4. Portfolio Turnover Ratio: Portfolio Turnover Ratio is the percentage of a mutual fund or other investment vehicle’s holdings that have been “turned over” or replaced with other holdings in a given year. The type of mutual fund, its investment objective and/or the portfolio manager’s investing style will play an important role in determining its turnover ratio.

For example, a stock index fund will have a low turnover rate, but a bond fund, whether passively or actively managed, will have high turnover because active trading is an inherent quality of bond investments. An aggressive small-cap growth stock fund will generally experience higher turnover than a large-cap value stock fund. All things being equal, investors should favor low turnover funds. High turnover equates to higher brokerage transaction fees, which reduce fund returns. Also, the more portfolio turnover in a fund, the more likely it will generate short-term capital gains, which are taxable at an investor’s ordinary income rate. Turnover ratios for a mutual fund will vary from year to year, but the general range can be assessed by looking at the figure over a few consecutive years.

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Comparative Analysis

1. Large Cap Funds

Reliance Vision Fund:

Investment Objective

This fund was launched in October 1995, with an objective to achieve long-term capital growth. It focuses on companies with large size capitalization with a small exposure to companies with mid size capitalization. The primary investment objective of the scheme is to achieve long term growth of capital by investment in equity and equity related securities through a research based investment approach. Its benchmark index is S&P CNX Nifty.

Reliance Vision Fund had a corpus of Rs 3591.84 Crores as on May 31, 2010.

Fund Performance as on May 31, 2010

Period % change in NAV % change in IndexLast 6 months 1.0% -3.0%

1 Year 22.4% 9.7%3 Years 6.9% 5.0%5 Years 21.7% 18.9%

Since Inception 24.4% -

Comparing the performance of the fund with its benchmark BSE 100, we find that the past six months while Reliance Vision fund grew by 1.0% its benchmark index declined by 2.5%. Thus, in the past six months this fund outperformed as compared to the benchmark index.

Kotak 30


It is an open-ended equity growth scheme with an objective to generate capital appreciation from a portfolio of predominantly equity related securities. The portfolio will generally comprise of equity and equity related instruments of around thirty

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companies which may go up to thirty nine companies. This scheme was launched on December 29; 1988. Its benchmark index is S&P CNX Nifty. The fund’s total corpus as on May 31, 2010 was Rs. 1023.24 Crores.

Analyzing the fund’s portfolio as on May 31, 2010, we gather that majority of its corpus is allocated in the Banking Sector (16.73%), Software (10.89%), Pharmaceuticals (9.06%), Petroleum Products (7.97%), Consumer Non Durables (6.60%), CBLO & Term Deposits & Rev. Repo (5.96%), Finance (5.71%), Construction Project (5.33%), Industrial Products (4.07%), Media & Entertainment (3.71%), Others (23.97%).


Period %change in NAV %change in IndexLast 6 months -1.8% -3.0%

1 Year 18.3% 9.7%3 Years 7.8% 5.0%5 Years 22.9% 18.9%


Birla Sun Life Frontline Equity Fund

Investment Objective:

It is an open-ended growth scheme with the objective of long term growth of capital, through a portfolio with a target allocation of 100% equity by aiming at being as diversified across various industries and or sectors. The scheme was launched on August 30, 2002. Its benchmark index is S&P CNX Nifty.


Period %change in NAV %change in IndexLast 6 Months -0.2% -3.0%

1 Year 22.4% 9.7%3 Years 11.8% 5.0%5 Years 25.8% 18.9%


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ICICI Prudential Focused Bluechip Equity Fund


The scheme was launched on August 19, 1999. Its benchmark index is S&P CNX Nifty.


Period %change in NAV %change in IndexLast 6 Months 2.2% -3.0%

1 Year 27.4% 9.7%3 Years - 5.0%5 Years - 18.9%


Comparing Performance

Fund/Period 6 Months 1 Year 3 Years 5 Years Since Inception

Reliance Vision

1.0% 22.4% 6.9% 21.7% 24.4%

ICICI Prudential Focused Bluechip

Equity Fund

2.2% 27.4% - - 17.2%

Kotak 30 -1.8% 18.3% 7.8% 22.9% 22.0%Birla Sun

Life Frontline Equity

-0.2% 22.4% 11.8% 25.8% 30.3%

Benchmark Returns

Fund/Performance 6 Months 1 Year 3 Years 5 Years Since Inception

Reliance Vision (-)0.4% 1.59% 1.21% 1.10% -ICICI Prudential Focused Bluechip

Equity Fund

(-)0.73% 2.82% - - -

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Kotak 30 0.6% 1.89% 1.56% 1.21% -Birla Sun Life

Frontline Equity0.06% 1.34% 1.98% 1.37% -

Comparing Risk

Fund/Risk Measure

Beta Standard Deviation

Sharpe Ratio Portfolio Turnover

Ratio

Expense Ratio

Reliance Vision

0.8529 4.2749 0.0376 1.71 1.8

ICICI Prudential Focused Bluechip

Equity Fund

0.82 29.66 0.69 0.62 2.0

Kotak 30 0.89 32.04 0.97 243.68% 2.0Birla Sun

Life Frontline Equity

0.85 33.42% 0.24% - 1.9

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2. Balanced Fund

Reliance Regular Savings Fund Balanced Option


The primary investment objective of this option is to generate consistent returns and appreciation of capital by investing in a mix of securities comprising of equity, equity related instruments and fixed income instruments. The inception date of this scheme is January 13; 2007. It had a total corpus of Rs 2994.33 crores as on May 31,2010. Its benchmark index is Crisil Balanced Fund Index.


Period %change in NAV %change in IndexLast 6 Months 7.3% 0.6%

1 Year 28.1% 10.2%3 Years 18.4% 7.9%5 Years - 15.1%


ICICI Prudential Balanced Fund


It is an open-ended balanced fund. Its objective is to generate long term capital appreciation and current income. This fund was launched on November 3, 1999. Its benchmark index is Crisil Balanced Fund Index.



1 Year 20.9% 10.2%3 Years 3.6% 7.9%5 Years 14.7% 15.1%


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Kotak Balance


To achieve growth by investing in equity and equity related instruments, balanced with income generation by investing in debt and money market instruments. This fund was launched on November 25; 1999. Its benchmark index is Crisil Balanced Fund Index, As on May 31, 2010 it had a total corpus of Rs.63.35 crores

As on May 31, 2010 the fund had invested majority of its portfolio in CBLO & Term deposits & Revenue Repot (13.37%), Debentures & Bonds (10.81), Banks (8.66%), Government Dated Securities (8.02%), Pharmaceuticals (7.54%), Software (5.91%), Consumer Non Durables (5.86%), Auto Ancillaries (4.61%), Petroleum Products (3.65%), Construction Project (2.68%), Others (28.89%).


Period %change in NAV %change in Index6 Months 0.8% 0.6%

1 Year 15.8% 10.2%3 Years 7.0% 7.9%5 Years 15.6% 15.1%


Birla Sun Life ’95 Fund


It is an open-ended balanced scheme with the objective of long term growth of capital and current income, through a portfolio of equity and fixed income securities. This fund was launched on February 10, 1995. Its benchmark index is Crisil Balanced Fund Index.



1 Year 22.9% 10.2%3 Years 11.3% 7.9%5 Years 20.7% 15.1%


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ICICI Prudential Balanced

3.0% 20.9% 3.6% 14.7% 14.1%

Kotak Balance

0.8% 15.8% 7.0% 15.6% 14.4%

Reliance- RSF

Balanced

7.3% 28.1% 18.4% - 15.1%

Birla Sun Life ’95

Fund

3.7% 22.9% 11.3% 20.7% 24.2%

Benchmark Returns

Fund/Period 6 Months 1 Year 3 Years 5 Years Since InceptionICICI

Prudential Balanced

5% 2.05% 0.46% 0.97% -

Kotak Balance

1.33% 1.55% 0.89% 1.033% -

Reliance- RSF

Balanced

12.17% 2.75% 2.32% - -


Fund

6.167% 2.25% 1.43% 1.37% -

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Comparing Risk

Fund/Risk Measure



Ratio

Expense Ratio


Fund

- 27.65% 0.26 - 2.4

ICICI Prudential Balanced

- 23.62% - 0.72 2.3

Kotak Balance

0.96 25.54% 0.94 251.85% 2.4

Reliance-RSF

Balanced

0.6784 3.4720 0.0891 4.15 2.3

3. Mid Cap Funds

Reliance Growth Fund


The primary investment objective of the scheme is to achieve long-term growth of capital by investing in equity and equity related securities through a research based investment approach. This fund was launched on October 8, 1995. Its benchmark index is BSE 100.It had a total corpus of Rs. 7428.96 as on May 31. 2010.



1 Year 31.3% 11.7%3 Years 13.6% 4.4%5 Years 26.7% 19.7%


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ICICI Discovery Fund


The objective is to generate returns through a combination of dividend income and capital appreciation by investing primarily in a well-diversified portfolio of value stocks. This fund was launched on August 16, 2004. Its benchmark index is BSE 100.



1 Year 61.3% 11.7%3 Years 15.5% 4.4%5 Years 23.9% 19.7%


Birla Mid Cap Fund


An open-ended growth scheme with the objective to achieve long-term growth of capital at controlled level of risk by primarily investing in mid cap stocks. This fund was launched on October 03, 2002. Its benchmark index is BSE 100.



1 Year 35.2% 11.7%3 Years 12.6% 4.4%5 Years 24.3% 19.7%


Kotak Mid Cap Fund


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It is an Open-Ended Equity Growth Scheme with the objective to generate capital appreciation from a diversified portfolio of equity and equity related securities. This fund was launched on February 24, 2005.



1 Year 38.7% 11.7%3 Years 0.9% 4.4%5 Years 15.6% 19.7%




ICICI Prudential Discovery

Fund

12.8% 61.3% 15.5% 23.9% 28.8%

Birla sun Life Mid Cap Fund

1.0% 35.2% 12.6% 24.3% 35.5%

Reliance Growth

5.8% 31.3% 13.6% 26.7% 29.4%

Kotak Mid Cap Fund

8.7% 38.7% 0.9% 15.6% 16.5%

Benchmark Returns

Fund/ Period 6 Months 1 Year 3 Years 5 Years Since Inception


Fund

-3.56 5.24 3.52 1.21 -

Birla Sun Life Mid Cap Fund

-0.28 3.01 2.86 1.23 -

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Reliance Growth

-1.61 2.68 3.09 1.36 -

Kotak Mid Cap Fund

-2.41 3.31 0.20 0.79

Comparing Risk

Fund/ Risk Measure



Ratio

Expense Ratio


Fund

- 38.03% 0.57 - 2.0

Birla Sun Life Mid Cap Fund

0.94 41.67% 0.21 - 2.00

Reliance Growth

0.8531 4.3902 0.0637 0.44 1.8

Kotak Mid Cap Fund

1.03 39.04 0.88 383.00% 2.4

4. Liquid Funds

Reliance Liquidity Fund


The investment objective of the scheme is to generate optimal returns consistent with moderate level of risk and high liquidity. Accordingly, investments shall predominantly be made in Debt and Money Market Instruments. This fund was launched on June 16, 2005.



1 Year 4.5% 3.1%3 Years 7.0% 6.2%5 Years - 6.19%


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Birla Sun Life Cash Manager


It is an open-ended liquid scheme with the objective to provide current income which is consistent with a portfolio that offers investors superior liquidity by investing 100% in a diversified portfolio debt (Fixed Income) and money market securities. This fund was launched on May 14, 1998.



1 Year 4.6% 3.1%3 Years 6.9% 6.2%5 Years - 6.19%


Kotak Liquid Institutional Premium Plan


Its objective is to provide reasonable returns and high level of liquidity by investing in debt and money market instruments of different maturities so as to spread risk across different kinds of issuers in the debt markets. This fund was launched on November 4, 2003.



1 Year 4.5% 3.1%3 Years 7.0% 6.2%5 Years 6.91% 6.19%


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ICICI Prudential Liquid Plan


An open-ended Liquid Income Fund. Its objective is to generate reasonable returns while providing high levels of liquidity. This fund was launched on September 28, 2003.



1 Year 4.5% 3.1%3 Years 7.0% 6.2%5 Years 6.76% 6.19%




ICICI Prudential

Liquid Plan

4.3% 4.5% 7.0% 6.76% 7.3%

Kotak Liquid

Institutional Premium

Plan

4.3% 4.5% 7.0% 6.91% 6.4%


4.4% 4.6% 6.9% - 6.4%

Reliance Liquidity

Fund

4.3% 4.5% 7.0% - 7.0%

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Benchmark Returns


ICICI Prudential

Liquid Plan

1.23% 1.45% 1.13% 1.09% -

Kotak Liquid

Institutional Premium

Plan

1.23% 1.45% 1.13% - 1.11%

Reliance Liquidity

Fund

1.23% 1.45% 1.13% - -


1.26% 1.48% 1.11% - -

Comparing Risk

Fund/ Risk Measure


Sharpe Ratio

Portfolio Turnover

Ratio

Expense Ratio

Average Maturity (Years)

ICICI Prudential

Liquid Plan

- 0.18% - - 0.4 -

Kotak Liquid

Institutional premium

Plan

0.01 0.20 0.02 - 0.6 -

Reliance Liquidity

Fund

- - - - 0.2 -

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- 0.15% - - 0.3 0.03

5. Income Funds

Reliance Income Fund


This is an open-ended income scheme. The primary investment objective of the scheme is to generate optimal returns consistent with moderate levels of risk. This income may be complemented by capital appreciation of the portfolio. Accordingly, investments shall predominantly be made in Debt & Money market Instruments. This Scheme was launched on January 1, 1998. Its total corpus as on May 31, 2010 was Rs 330.55 crores. Its Benchmark Index is Crisil Composite Bond Fund Index.



1 Year 4.5% 4.7%3Years 10.2% 7.1%5 Years 8.0% 5.7%


ICICI Prudential Income Plan


This is an open-ended debt fund. Its objective is to generate income through investment in debt securities. This fund was launched on July 09; 1998. Its benchmark index is Crisil Composite Bond Fund Index.

Funds Performance as on May 31, 2010


1 Year 4.3% 4.7%

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3 Years 12.4% 7.1%5 Years 9.3% 5.7%


Kotak Bond Deposit Fund


It is an open-ended debt scheme. Its objective is to create a portfolio of debt and money market instruments of different maturities so as to spread the risk across a wide maturity horizon & different kinds of issuers in debt market. This fund was launched on November 25, 1999. Its total corpus as on May 31, 2010 was Rs.39.49 crores. Its benchmark Index is Crisil Composite Bond Fund Index.

As on May 31, 2010 its portfolio comprised of Debentures and Bonds (19.77%), Government Dated Securities (48.84%), CBLO & Team Deposits & Revenue Repot (7.38%), Net Current Assets (24.01%).

If we look at the fund’s portfolio by rating class we find the contributions are:AAA, CARE AAA, SOV (62.01%), Net Current Assets (24.01%), CBLO & Term Deposits & Revenue Repo (7.38%), AA+ (6.6%).



1 Year 7.3% 4.7%3 Years 10.6% 7.1%5 Years 8.1% 5.7%


Birla Sun Life Dynamic Bond Fund


It is an open-ended income scheme with the objective to generate optimal returns with high liquidity through active management of the portfolio by investing in high quality debt and money market instruments. This fund was launched on September 27, 2004. its benchmark index is CRISIL Composite Bond Fund.

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1 Year 7.2% 4.7%3 Years 10.4% 7.1%5 Years 8.6% 5.7%




Birla Sun Life

Dynamic Bond Fund

6.4% 7.2% 10.4% 8.6% 8.2%

ICICI Prudential

Income PLAN

2.5% 4.3% 12.4% 9.3% 8.2%

Kotak Bond Deposit

9.9% 7.3% 10.6% 8.1% 9.2%


5.0% 4.5% 10.2% 8.0% 9.6%

Benchmark Returns


Birla Sun Life

Dynamic Bond Fund

1.18% 1.53% 1.46% 1.51% -

ICICI 0.46% 0.91% 1.75% 1.63% -

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Prudential Income PlanKotak Bond

Deposit1.83% 1.55% 1.49% 1.42% -


0.93% 0.96% 1.44% 1.40% -

Comparing Risk

Fund/Risk Measure


Sharpe Ratio

Portfolio Turnover

Ratio

Expense Ratio

Average Maturity

ICICI Prudential

Income Plan

- 10.54% - - 1.3 2.46 Years

Kotak Bond

Deposit

0.89 8.91 0.23 - 2.1 -


- - - - 1.5 -

Birla Sun Life

Dynamic Bond fund

- 0.89% - - 1.0 1.95 Years

6. Gilt Funds Short Term

ICICI Prudential Gilt Fund Treasury Plan


It is an open-end short term gilt fund. Its objective is to generate regular returns through investments made in gilts. This fund was launched on August 19; 1999. Its benchmark index is NSE Treasury Bill Index.

Fund’s Performance as on May 31, 2010

Period %change in NAV %change in Index

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6 Months 4.97% 4.5%1 Year 3.17% 3.9%3 Years 10.56% 6.5%5 Years 8.47% -


Kotak Gilt savings Plan


It is an open-ended dedicated Gilt scheme. Its objective is to generate risk free returns through investments in Sovereign Securities issued by the Central and/or State Government(s) and or Reverse Repos in such securities. This fund was launched on December 29, 1998. It had a total corpus of Rs.82.69 crores as on May 31, 2010. Its Benchmark index is NSE Treasury Bill Index.

As on May 31, 2010 the fund’s portfolio comprised of Government Dated Securities (79.7%), Net Current Assets (2.16%), CBLO & Term Deposits & Revenue Repo (18.14%).

If we look at the fund’s portfolio by rating class we find the contributions are:SOV (79.7%), CBLO & Term Deposits & Revenue Repo (18.14%), Net Current Assets(2.16%).

Fund’s Performance as on May 31, 2010


1 Year 3.81% 3.9%3 Years 5.61% 6.5%5 Years 5.50% -


Birla Sun Life Gilt Plus


An open-ended government securities scheme with the objective to generate income and capital appreciation through investments exclusively in Government Securities. This fund was launched on October 12, 1999. Its Benchmark index is NSE Treasury Bill Index.


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1 Year 5.14% 3.9%3 Years 5.14% 6.5%5 Years 5.41% -


Reliance Gilt Securities Fund


The primary investment objective of the scheme is to generate optimal credit risk-free returns by investing in a portfolio of securities issued ad guaranteed by the Central Government and State Government. This fund was launched on August 22, 2008. Its Benchmark index is NSE Treasury Bill Index.



1 Year 3.64% 3.9%3 Years 4.30% 6.5%5 Years 4.02% -



Funds/Performance 6 Months 1 Year 3 Years 5 years Since Inception

ICICI Prudential Gilt Fund-

Treasury Plan

4.97% 3.17% 10.56% 8.47% 8.7%

Kotak Gilt Savings Plan

6.40% 3.81% 5.61% 5.50% 7.0%

Birla Sun Life Gilt Plus

7.37% 5.14% 5.14% 5.41% 7.4%

Reliance Gilt Securities Fund

1.89% 3.64% 4.30% 4.02% 4.1%

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Benchmark Returns

Fund/ Performance

6 Months 1 Year 3 Years 5 Years Since Inception

ICICI Prudential Gilt Fund- Treasury

Plan

1.10% 0.81% 1.62% - -

Kotak Gilt Savings Plan

1.42% 0.98% 0.86% - -

Birla Sun Life Gilt

Plus

1.64% 1.32% 0.79% - -

Reliance Gilt

Securities Fund

1.10% 0.93% 0.66% - -

Comparing Risk

Fund/ Risk

Measure


Sharpe Ratio

Portfolio Turnover

Ratio

Expense Ratio

Average Maturity (Years)

ICICI Prudential

Gilt Treasury

Plan

- 5.64% - - 1.0 1.54

Kotak Gilt Savings

Plan

0.04 1.30 0.10 - 1.1 -

Birla Sun Life Gilt -

1.78% - - 0.5 -

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PlusReliance

Gilt Securities

Fund

- - - - 1.3 -

7. Gilt Funds Long Term

ICICI Prudential Gilt Fund Investment Plan


This is an open-ended long-term Gilt Fund. Its objective is to generate regular returns through investments made in gilts. This fund was launched on August 19, 1999. Its benchmark index is NSE G Sec Composite Index.



1 Year 0.4% -0.6%3 Years 12.0% 6.7%5 Years 9.4% 4.9%


Kotak Gilt Investment


It is an open-ended debt scheme. Its objective is to generate risk free returns through investment in sovereign securities issued by the Central and/or State Governments and/or reverse repos in such securities. This fund was launched on December 29, 1998. Its total corpus as on May 31, 2010 was Rs.45.56 Crores. Its Benchmark index is NSE G Sec Composite Index.

The fund’s portfolio as on May 31, 2010 comprised of Government Dated Securities (79.03%), Net Current Assets (14.8%), CBLO & Term Deposits & Rev. Repo (6.17%).

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Fund Performance as on May 31,2010


1 Year 7.4% -0.6%3 Years 10.5% 6.7%5 Years 7.6% 4.9%


Birla Sun Life Government Securities Fund


It is an open-ended Gilt scheme with the objective to provide investors current income consistent with a portfolio invested 100% in securities issued by the Government of India or the State Governments, and the secondary objective is capital appreciation. This fund was launched on October 28, 1999. Its benchmark index is NSE G Sec Composite Index.



1 Year 12.2% -0.6%3 Years 10.9% 6.7%5 Years 8.2% 4.9%




ICICI Prudential

Gilt- Investment

Plan

2.7% 0.4% 12.0% 9.4% 11.3%

Kotak Gilt- Investment

Fund

8.9% 7.4% 10.5% 7.6% 10.7%

Birla Sun Life

Government Securities

14.7% 12.2% 10.9% 8.2% 10.0%

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Fund

Benchmark Returns


ICICI Prudential

Gilt- Investment

Plan

1% .-0.67% 1.79% 1.92% -

Kotak Gilt- Investment

Fund

3.29% -12.3% 1.57% 1.55% -

Birla Sun Life

Government Securities

Fund

5.44% -20.3% 1.63% 1.67% -

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Portfolio Design according to varying risk appetite

Young Unmarried Stage:

Young unmarried professionals have no liability and still depend to an extent on their parents before full independence. They have considerable investment needs and may wish to invest in equities as they have a longer horizon and as a result a higher risk appetite. Thus, the young investor should invest majority of his portfolio in aggressive equity stocks which would give him maximum capital appreciation. The investor should diversify his portfolio by investing a part of his total investment in relatively safer options like Balanced Equity Funds, Liquid or Money Market Funds and Bond Funds.

According to me the ideal investment for this category of investors would be:

10% BSL Frontline Equity10% Kotak 3010% Reliance Vision10% ICICI Discovery Fund10% BSL Mid Cap Fund10% Reliance Growth5% BSL ’95 Fund5% Kotak Balance5% Reliance RSF Balance5% ICICI Prudential Gilt Treasury Plan.5% Kotak Gilt saving Plan5% ICICI Prudential Gilt Investment Plan5% Kotak Gilt Investment Fund5% Income Fund

This portfolio, designed for a young unmarried professional with a high risk appetite comprises of- 50% Highly Aggressive Equity Funds, 12.5% Moderately Aggressive Equity Funds, 12.5% Balanced Funds, 5% Bond Funds, 10% Short Term Gilt Funds, 10% Money Market Funds.

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75% of the young investor’s portfolio is invested in Equity whereas the rest is invested in Debt. While Equity instruments target capital appreciation Debt Funds offer protection of the principal.

Young Married with Children Stage

This stage is comparatively a difficult stage as expenditure is rising fast with the growing needs of the child. A substantial life assurance on the wage earner’s life is also now absolutely necessary. Once protection needs are taken care of, the family will have to make provisions for investments. These investment needs could take various forms. The most common are saving for children’s education and marriage, adequate provision for retirement etc.

Married with Older Children

By this stage, the individuals are approaching their mid-career and their incomes would have usually increased. With improving finances, the family lifestyle will have improved and become more affluent. The financial planning priorities would be changing from available protection needs to investment needs. The need for annual investment required to fund a good pension is also growing.

Retirement Stage:

Most people would like to maintain the same standard of living in retirement as they did when they worked. It is a thumb rule that people need an annual retirement income equal to two-third’s of their final year’s income from employment. Thus, at this stage the individual has a low risk appetite and he has to be very careful about his investment.

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Project report

Economy & Finance

Transcript of Project report