Risk and Return Analysis of Equity Mutual Fund

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Dissertation on

A Study of Risk and Return Analysis of Equity Mutual

FundsPREPARED BY

Mohammad MajidBATCH - 2009-2011

AS A PARTIAL FULFILLMENT OF MBA PROGRAMME

OF

JAMIA HAMDARD, NEW DELHI

UNDER THE GUIDANCE OF

MR. P.S RAYCHAUDHARI


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Acknowledgement

I would like to express my gratitude to all those who gave me theopportunity and subsequently guidance to complete this project. Amission of this magnitude could not have been be under takenwithout the guiding light of inspiration, cooperation, criticalsupervision, encouragement and above all the blessings ofAlmighty ALLAH.

It is with such a multitude of emotions that I shall ever remember

the inspiring encouragement of my supervisor MR. P.SRAYCHAUDHARI at every step during the period of the presentstudy.

I am thankful to my institute and the faculty for their constantsupport and guidance throughout my project work. I am bound tothank other staff members for their stimulating support.

I would like to give my special thanks to my PARENTS , theirconstant support enabled me to complete this project work


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CERTIFICATE

This is to certify that this dissertation project named A Study of

Risk and Return Analysis of Equity Mutual Fundshas been

made by Mohammad MajidofMBA-Gen under the guidance of

Mr. P.S. Raychaudhari and has completed it sucessfully.

Mohammad Majid Mr. P.S. Raychaudhari

(signature) (signature)


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ABSTRACT

Mutual Funds (MF) have become one of the most attractive waysfor the average person to invest their money. It is said that bankinvestment is the first priority of people to invest their savings andthe second place is for investment is held by mutual funds and there afte r other avenues. A Mutual Fund pools resources fromthousands of investors and then diversifies its investment intomany different holdings such as stocks, bonds, or Governmentsecurities in order to provide high relative safety and returns as per

the scheme principles.

The Project is a FINANCE PROJECT which tries to explain inlaymans language about the history, growth, & pros and cons ofinvesting in Mutual Funds and the second part of it deals with theanalysis of risk and returns of equity schemes of different MutualFund Companies.

The main objective of the project was to get an overview ofMutual Fund Industry, its set up, its working and to find out therisks and returns of equity schemes of different Mutual FundCompanies.

The project includes a brief idea about the growth of MF industry(History), the broad idea about the organization and concept of MFand SEBI Guidelines on Mutual Funds. There are many

improvements pending in the field and it has to happen as soon aspossible so as to call the MF industry as an Organized and well-developed sector.


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The past performance of MF is not necessarily indicative of futureperformance of the scheme and no AMC guarantees Returns and orsafety of Principal.


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INTRODUCTION TO MUTUAL FUNDS

MUTUAL FUNDS - THE CONCEPT

A Mutual Fund is a trust that pools the savings of a number ofinvestors who share a common financial goal. The money thuscollected is then invested in capital market instruments such asshares, debentures and other securities. The income earned throughthese investments and the capital appreciations realized are sharedby its unit holders in proportion to the number of units owned bythem. 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.

A mutual fund is a professionally managed type of collectiveinvestment scheme that pools money from many investors andinvests it in stocks, bonds, short- term money market instruments,and/or other securities. The mutual fund will have a fund managerthat trades the pooled money on a regular basis. As of early 2008,

the worldwide value of all mutual funds totals more than $26trillion. In the rest of the world, mutual fund is used as a genericterm for various types of collective investment vehicles, such asunit trusts, open-ended investment companies (OEICs), unitizedinsurance funds, and undertakings for collective investments intransferable securities.

Mutual funds can invest in many kinds of securities. The most

common are cash instruments, stock, and bonds, but there arehundreds of sub-categories. Stock funds, for instance, can investprimarily in the shares of a particular industry, such as technologyor utilities. These are known as sector funds. Bond funds can varyaccording to risk (e.g., high-yield junk bonds or investment-gradecorporate bonds), type of issuers (e.g., government agencies,


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corporations, or municipalities), or maturity of the bonds (short- orlong-term). Both stock and bond funds can invest in primarily U.S.securities (domesticfunds), both U.S. and foreign securities (globalfunds), or primarily foreign securities (international funds).

Most mutual funds' investment portfolios are continually adjustedunder the supervision of a professional manager, who forecastscash flows into and out of the fund by investors, as well as thefuture performance of investments appropriate for the fund andchooses those which he or she believes will most closely match thefund's stated investment objective. A mutual fund is administeredunder an advisory contract with a management company, which

may hire or fire fund managers.

Mutual funds are subject to a special set of regulatory, accounting,and tax rules. In the U.S., unlike most other types of businessentities, they are not taxed on their income as long as theydistribute 90% of it to their shareholders and the funds meet certaindiversification requirements in the Internal Revenue Code. Also,the type of income they earn is often unchanged as it passesthrough to the shareholders. Mutual fund distributions of tax- freemunicipal bond income are tax-free to the shareholder. Taxabledistributions can be either ordinary income or capital gains,depending on how the fund earned those distributions. Net lossesare not distributed or passed through to fund investors.

The mutual fund industry in India started in 1963 with theformation of Unit Trust of India, at the initiative of theGovernment of India and Reserve Bank. In the last few years

Indian Mutual Fund industry has grown at a rapid pace. Some ofthe top performing and best mutual funds in India are: SBI MutualFunds, UTI Mutual Funds, Prudential ICICI Mutual Funds andHDFC Mutual Funds.


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The flow chart below describes broadly the working of a

mutual fund:

The following simple diagram clearly shows the working of a

mutual fund:-


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ADVANTAGES OF MUTUAL FUNDS:

Professional Management - The primary advantage of funds (atleast theoretically) is the professional management of your money.

Investors purchase funds because they do not have the time or theexpertise to manage their own portfolios. A mutual fund is arelatively inexpensive way for a small investor to get a full-timemanager to make and monitor.

Diversification

By owning shares in a mutual fund instead of owning individualstocks or bonds, your risk is spread out. The idea behinddiversification is to invest in a large number of assets so that a lossin any particular investment is minimized by gains in others. Inother words, the more stocks and bonds you own, the less any oneof them can hurt you (think about Enron). Large mutual fundstypically own hundreds of different stocks in many differentindustries. It wouldn't be possible for an investor to build this kind

of a portfolio with a small amount of money.

Economies of Scale

Because a mutual fund buys and sells large amounts of securities ata time, its transaction costs are lower than what an individualwould pay for securities.

Liquidity

Just like an individual stock, a mutual fund allows you to requestthat your shares be converted into cash at any time. Simplicity -Buying a mutual fund is easy! Pretty well any bank has its own


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line of mutual funds, and the minimum investment is small. Mostcompanies also have automatic purchase plans whereby as little as$100 can be invested on a monthly basis.

DISADVANTAGES OF MUTUAL FUNDS

Costs

Mutual funds don't exist solely to make your life easier - all fundsare in it for a profit. The mutual fund industry is masterful at

burying costs under layers of jargon. These costs are socomplicated that in this tutorial we have devoted an entire sectionto the subject.

Dilution

It's possible to have too much diversification. Because funds have

small holdings in so many different companies, high returns from afew investments often don't make much difference on the overallreturn. Dilution is also the result of a successful fund getting toobig. When money pours into funds that have had strong success,the manager often has trouble finding a good investment for all thenew money.

Taxes

When making decisions about your money, fund managers don'tconsider your personal tax situation. For example, when a fundmanager sells a security, a capital-gains tax is triggered, whichaffects how profitable the individual is from the sale. It might have


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been more advantageous for the individual to defer the capitalgains liability.


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STATEMENT OF THE PROBLEM:

The project deals with the Overview of Mutual Industry in Indiaand evaluation study of Risk and Returns Equity Schemes of

different mutual fund companies.

OBJECTIVES OF THE STUDY:

To study Mutual Fund Industry in India. To study the performance of equity schemes of differentcompany. To study the Risk involved in different Schemes. To compare the returns of different mutual funds.

HYPOTHESIS:

H0 : There is no significant difference between the returns of

Mutual Fund Companies.

H1 : There is a significant difference in the returns of Mutual FundCompanies.


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LITERATURE SURVEY

Investors shy away from equity mutual funds

Source: The Economic Times/ Nishant Kumar / Reuters

Mumbai: Investors are shying away from Indian equity funds as asustained slump in the stock market wipes out a major chunk oftheir stunning gains in 2007, but the industry is not yet facingpressure from redemptions.

Diversified stock funds delivered returns of nearly 60% in 2007, as

the benchmark stock index rose 47%.

But with the market down about a quarter so far in 2008, investorshave seen the value of their holdings cut by almost a third and havestarted cutting back on new investments.

There has been a slowdown in the flows of equity funds in the lasttwo months, Sanjay Prakash, chief executive of the Indian fund

unit of HSBC, told Reuters.

We are seeing net inflows every day, but very small amounts,said Prakash, whose firm saw its average monthly assets drop0.95% to Rs184.7 billion ($4.3 billion) in the six months endingMay.Mesmerised by a six-times rise in the stock market in the five yearsto the end of 2007, investors saw a 23% drop in the March quarter

as a buying opportunity, pouring in Rs449 billion into the funds,67% more than a year earlier.

But as the market slump persists, euphoria has given way tocaution. Flows into equity funds slumped to Rs45.9 billion inApril, the lowest since August 2006, and about Rs48 billion in


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May, data from the Association of Mutual Funds in India (AMFI)showed.

The money is mainly coming from preset investment plans where

a fixed sum is deposited regularly into the funds. The industrybody estimates there are about 3 million such accounts.

Slowdown is in the high net-worth and institutional segment,said Vikrant Gugnani, the chief executive of Indias number onefund firm, Reliance Capital Asset Management. He said big-ticketinvestors were no longer looking at stocks, shifting instead to realestate, gold and fixed-maturity plans, which essentially close-end

bond funds are investing in securities in line with their maturityprofile.

Investors may not be topping up their funds, but they are also notin a hurry to pull out of them. Outflows of Rs36 billion in Maywere lowest since July 2006, AMFI data showed. Outflows fromequity funds in January, when the stock market hit a record highand before dropping sharply, were more than two times those ofMay, but inflows were even higher at a record Rs212.5 billion.

Equity funds are not likely to see any major redemption pressure ifthe stock market held above 14,000 as investors would like to waitfor a recovery, HSBCs Prakash said, adding there might be higherredemptions if the market dropped below 13,000. Indian shares fellto a 2008 low of 14,645 on June 10.

While the market was trading above 15,000 on Thursday, Credit

Suisse saw it falling to 13,000 by end-2008.


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HISTORY OF MUTUAL FUNDS

(WORLDWIDE):

When three Boston securities executives pooled their moneytogether in 1924 to create the first mutual fund, they had no ideahow popular mutual funds would become.

The idea of pooling money together for investing purposes startedin Europe in the mid-1800s. The first pooled fund in the U.S. wascreated in 1893 for the faculty and staff of Harvard University. OnMarch 21st, 1924 the first official mutual fund was born. It was

called the Massachusetts Investors Trust.

After one year, the Massachusetts Investors Trust grew from$50,000 in assets in 1924 to $392,000 in assets (with around 200shareholders). In contrast, there are over 10,000 mutual funds inthe U.S. today totalling around $7 trillion (with approximately 83million individual investors) according to the Investment CompanyInstitute.

The stock market crash of 1929 slowed the growth of mutualfunds. In response to the stock market crash, Congress passed theSecurities Act of 1933 and the Securities Exchange Act of 1934.These laws require that a fund be registered with the SEC andprovide prospective investors with a prospectus. The SEC (U.S.Securities and Exchange Commission) helped create theInvestment Company Act of 1940, which provides the guidelinesthat all funds must comply with today.

With renewed confidence in the stock market, mutual funds beganto blossom. By the end of the 1960s there were around 270 fundswith $48 billion in assets.


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In 1976, John C. Bogle opened the first retail index fund called theFirst Index Investment Trust. It is now called the Vanguard 500Index fund. In November of 2000 it became the largest mutualfund ever with $100 billion in assets.


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HISTORY OF INDIAN MUTUAL FUND

INDUSTRY

The history of Mutual Funds in India can be broadly divided into 4Phases:

1.First phase (1964-1987)

The Unit Trust of India (UTI) was established in the year 1963by passing an Act in the Parliament.

The UTI was setup by the Reserve Bank of India (RBI) andfunctioned under the Regulatory and Administrative control ofthe RBI.

The First scheme in the history of mutual funds was UNITSCHEME-64, which is popularly known as US-64.

In 1978, UTI was de-linked from RBI. The Industrial

Development Bank of India (IDBI) took over the Regulatoryand Administrative control.

At the end of the year 1988, UTI had Rs.6,700/- Crores ofAssets Under Management.

2.Second phase (1987-1993)

Entry of Public Sector Funds.

In the year 1987, public sector Mutual Funds setup by publicsector banks.


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Life Insurance Corporation of India (LIC) and GeneralInsurance Corporation of India (GIC) came in to existence.

State Bank of India Mutual Fund was the first non-UTI Mutual

Fund.

The following are the non-UTI Mutual Funds at initial stages-

SBI Mutual Fund in June 1987. Can Bank Mutual Fund in December 1987. LIC Mutual Fund in June 1989. Punjab National Bank Mutual Fund in August 1989.

Indian Bank Mutual Fund in November 1989. Bank of India Mutual Fund in June 1990. GIC Mutual Fund in December 1990. Bank of Baroda Mutual Fund in October 1992.At the end of 1993, the entire Mutual Fund Industry had Assetsunder Management (AUM) of Rs. 47, 004/- Crores.

3.Third phase (1993-2003)

Entry of Private Sector Funds - a wide choice to Indian MutualFund investors.

In 1993, the first Mutual Fund Regulations came into existence,under which all mutual funds except UTI were to be registeredand governed.

The Erstwhile Kothari Pioneer (now merged with FranklinTempleton) was the first private sector Mutual Fund Registeredin July 1993.


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In 1996, the 1993 Securities Exchange Board of India (SEBI)Mutual Funds Regulations were substituted by a morecomprehensive and revised Mutual Fund regulator.

The number of Mutual Fund houses went on increasing, withmany foreign mutual funds setting up funds in India.

In this time, the Mutual Fund industry has witnessed severalMergers & Acquisitions.

4.Fourth phase (since 2003 February)

Following the repeal of the UTI Act in February 2003, it was(UTI) bifurcated into 2 separate entities.

One is the specified undertaking of the UTI with asset undermanagement of Rs.29,835/- Crores as at the end of January2003.

The second is the UTI Mutual Funds Limited, sponsored byState Bank of India, Punjab National Bank, Bank of Baroda andLife Insurance Corporation of India.

UTI is functioning under an Administrator and under the Rulesframed by the Government of India and does not come underthe purview of the Mutual Fund Regulations.

The UTI Mutual Funds Limited is registered with SEBI and

functions under the Mutual Funds Regulations.


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Association of Mutual Funds in India

(AMFI)

With the increase in Mutual Fund players in India, a need forMutual Fund Association in India was generated to function as anon-profit organization. Association of Mutual Funds in India(AMFI) was incorporated on 22nd August, 1995.

AMFI is an apex body of all Asset Management Companies(AMC) which has been registered with Securities Exchange Board

of India (SEBI). Till date all the AMCs are that have launchedmutual fund schemes are its members. It functions under thesupervision and guidelines of its Board of Directors.

Association of Mutual Funds India has brought down the IndianMutual Fund Industry to a professional and healthy market withethical lines enhancing and maintaining standards. It follows theprinciple of both protecting and promoting the interests of mutualfunds as well as their unit holders.

The Association of Mutual Funds of India works with 30 registeredAMCs of the country. It has certain defined objectives which

juxtaposes the guidelines of its Board of Directors.

The objectives are as follows:

This Mutual Fund Association of India maintains highprofessional and ethical standards in all areas of operation of theindustry.

It also recommends and promotes the top class business practicesand code of conduct which is followed by members and related


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people engaged in the activities of Mutual Fund and AssetManagement. The agencies who are by any means connected orinvolved in the field of capital markets and financial services alsoinvolved in this code of conduct of the association.

The sponsors of Association of Mutual Funds in India:

A. Bank Sponsored

1. Joint Ventures - Predominantly Indian- Canara Robeco Asset Management Company Limited

- SBI Funds Management Private Limited

2. Others -UTI Asset Management Company Ltd

B. Institutions- LIC Mutual Fund Asset Management Company Limited

C. Private Sector

1. Indian- Benchmark Asset Management Company Pvt. Ltd.- DBS Cholamandalam Asset Management Ltd.- Deutsche Asset Management (India) Pvt. Ltd.- Edelweiss Asset Management Limited

- Escorts Asset Management Limited- IDFC Asset Management Company Private Limited- JM Financial Asset Management Private Limited- Kotak Mahindra Asset Management Company Limited(KMAMCL)- Quantum Asset Management Co. Private Ltd.


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- Reliance Capital Asset Management Ltd.- Religare Asset Management Company Pvt. Ltd.- Sahara Asset Management Company Private Limited- Tata Asset Management Limited - Taurus Asset Management

Company Limited

2. Foreign

- AIG Global Asset Management Company (India) Pvt. Ltd.- FIL Fund Management Private Limited- Fortis Investment Management (India) Pvt. Ltd.- Franklin Templeton Asset Management (India) Private Limited- Goldman Sachs Asset Management (India) Private Limited

- Mirae Asset Global Investments (India) Pvt. Ltd.

3. Joint Ventures - Predominantly Indian- Birla Sun Life Asset Management Company Limited- DSP BlackRock Investment Managers Limited- HDFC Asset Management Company Limited- ICICI Prudential Asset Mgmt.Company Limited- Religare AEGON Asset Management Company Pvt. Ltd.- Sundaram BNP Paribas Asset Management Company Limited

4. Joint Ventures - Predominantly Foreign- Baroda Pioneer Asset Management Company Limited- Bharti AXA Investment Managers Private Limited- HSBC Asset Management (India) Private Ltd.- ING Investment Management (India) Pvt. Ltd.- JPMorgan Asset Management India Pvt. Ltd.- Morgan Stanley Investment Management Pvt.Ltd.

- Principal Pnb Asset Management Co. Pvt. Ltd.- Shinsei Asset Management (India) Pvt. Ltd.


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TYPES OF MUTUAL FUNDS

Open-end fund

The term mutual fund is the common name for what is classified asan open-end investment company by the SEC. Being open-endedmeans that, at the end of every day, the fund issues new shares toinvestors and buys back shares from investors wishing to leave thefund.

Mutual funds must be structured as corporations or trusts, such asbusiness trusts, and any corporation or trust will be classified bythe SEC as an investment company if it issues securities andprimarily invests in non-government securities. An investmentcompany will be classified by the SEC as an open-end investmentcompany if they do not issue undivided interests in specifiedsecurities (the defining characteristic of unit investment trusts orUITs) and if they issue redeemable securities. Registered

investment companies that are not UITs or open-end investmentcompanies are closed- end funds. Neither UITs nor closed-endfunds are mutual funds (as that term is used in the US).

Exchange-traded funds

A relatively recent innovation, the exchange-traded fund or ETF, is

often structured as an open-end investment company. ETFscombine characteristics of both mutual funds and closed-endfunds. ETFs are traded throughout the day on a stock exchange,

just like closed- end funds, but at prices generally approximatingthe ETF's net asset value. Most ETFs are index funds and trackstock market indexes. Shares are issued or redeemed by


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institutional investors in large blocks (typically of 50,000). Mostinvestors purchase and sell shares through brokers in markettransactions. Because the institutional investors normally purchaseand redeem in in kind transactions, ETFs are more efficient than

traditional mutual funds (which are continuously issuing andredeeming securities and, to effect such transactions, continuallybuying and selling securities and maintaining liquidity positions)and therefore tend to have lower expenses.

Exchange-traded funds are also valuable for foreign investors whoare often able to buy and sell securities traded on a stock market,but who, for regulatory reasons, are limited in their ability to

participate in traditional U.S. mutual funds.

Equity funds

Equity funds, which consist mainly of stock investments, are themost common type of mutual fund. Equity funds hold 50 percentof all amounts invested in mutual funds in the United States. Often

equity funds focus investments on particular strategies and certaintypes of issuers.

Bond funds

Bond funds account for 18% of mutual fund assets.Types of bondfunds include term funds, which have a fixed set of time (short-,medium-, or long-term) before they mature. Municipal bond fundsgenerally have lower returns, but have tax advantages and lowerrisk. High-yield bond funds invest in corporate bonds, includinghigh-yield or junk bonds. With the potential for high yield, thesebonds also come with greater risk.


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Money market funds

Money market funds hold 26% of mutual fund assets in the UnitedStates. Money market funds entail the least risk, as well as lower

rates of return. Unlike certificates of deposit (CDs), money marketshares are liquid and redeemable at any time.

Funds of funds

Funds of funds (FoF) are mutual funds which invest in otherunderlying mutual funds (i.e., they are funds comprised of other

funds). The funds at the underlying level are typically funds whichan investor can invest in individually. A fund of funds willtypically charge a management fee which is smaller than that of anormal fund because it is considered a fee charged for assetallocation services. The fees charged at the underlying fund leveldo not pass through the statement of operations, but are usuallydisclosed in the fund's annual report, prospectus, or statement ofadditional information. The fund should be evaluated on the

combination of the fund-level expenses and underlying fundexpenses, as these both reduce the return to the investor.

Most FoFs invest in affiliated funds (i.e., mutual funds managed bythe same advisor), although some invest in funds managed by other(unaffiliated) advisors. The cost associated with investing in anunaffiliated underlying fund is most often higher than investing inan affiliated underlying because of the investment managementresearch involved in investing in fund advised by a differentadvisor. Recently, FoFs have been classified into those that areactively managed (in which the investment advisor reallocatesfrequently among the underlying funds in order to adjust tochanging market conditions) and those that are passively managed


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(the investment advisor allocates assets on the basis of on anallocation model which is rebalanced on a regular basis).

The design of FoFs is structured in such a way as to provide a

ready mix of mutual funds for investors who are unable to orunwilling to determine their own asset allocation model. Fundcompanies such as TIAA-CREF, American Century Investments,Vanguard, and Fidelity have also entered this market to provideinvestors with these options and take the "guess work" out ofselecting funds. The allocation mixes usually vary by the time theinvestor would like to retire: 2020, 2030, 2050, etc. The moredistant the target retirement date, the more aggressive the asset

mix.

Hedge funds

Hedge funds in the United States are pooled investment funds withloose SEC regulation and should not be confused with mutualfunds. Some hedge fund managers are required to register with

SEC as investment advisers under the Investment Advisers Act.The Act does not require an adviser to follow or avoid anyparticular investment strategies, nor does it require or prohibitspecific investments. Hedge funds typically charge a managementfee of 1% or more, plus a "performance fee" of 20% of the hedgefund's profits. There may be a "lock-up" period, during which aninvestor cannot cash in shares. A variation of the hedge strategy isthe 130-30 fund for individual investors.

Equity funds

A stock fund or equity fund is a fund that invests in Equities morecommonly known as stocks. Such funds are typically held either in


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stock or cash, as opposed to Bonds, notes, or other securities. Thismay be a mutual fund or exchange-traded fund. The objective of anequity fund is long-term growth through capital appreciation,although dividends and interest are also sources of revenue.

Specific equity funds may focus on a certain sector of the marketor may be geared toward a certain level of risk.

Stock funds can be distinguished by several properties. Funds mayhave a specific style, for example, value or growth. Funds mayinvest in solely the securities from one country, or from manycountries. Funds may focus on some size of company, that is,small-cap, large-cap, et cetera. Funds which are managed by

professionals are said to be actively managed where as Index fundstry as best as possible to mirror specific market indices.


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FUND TYPES

Index Fund

Index funds invest in securities to mirror a market index, such asthe S&P 500. An index fund buys and sells securities in a mannerthat mirrors the composition of the selected index. The fund'sperformance tracks the underlying index's performance. Turnoverof securities in an index fund's portfolio is minimal. As a result, anindex fund generally has lower management costs than other typesof funds.

Growth Fund

A growth fund invests in the stocks of companies that are growingrapidly. Growth companies tend to reinvest all or most of theirprofits for research and development rather than pay dividends.Growth funds are focused on generating capital gains rather than

income.

Value Fund

This is a fund that invests in "value" stocks. Companies rated asvalue stocks usually are older, established businesses that paydividends.

Sector (Specialized)

Fund A Fund that tracks one area of industry, is called a SectorFund. Most sector funds have a minimum of 25% of their assets


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invested in its specialty. These funds offer high appreciationpotential, but may also pose higher risks to the investor. Examplesinclude gold funds (gold mining stock), technology funds, andutility funds.

Income Fund

An income fund stresses current income over growth. The fundsobjective may be accomplished by investing in the stocks ofcompanies with long histories of dividend payments, such as utilitystocks, blue-chip stocks, and preferred stocks.

Option income funds invest in securities on which options may bywritten and earn premium income from writing options. They mayalso earn capital gains from trading options at a profit. These fundsseek to increase total return by adding income generated by theoptions to appreciation on the securities held in the portfolio.

Balanced Fund

Balanced Funds invest in stocks for appreciation and bonds forincome. The goal is to provide a regular income payment to thefund holder, while increasing its principal.

Asset Allocation Fund

These funds split investments between growth stocks, incomestocks/bonds, and money market instruments or cash for stability.Fund advisers switch the percentage of holdings in each assetcategory according to the performance of that group. Example: Afund may have 60% invested in stocks, 20% in bonds, and 20% in


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cash or money market. If the stock market is expected to do well,that could switch to 80% stocks, and 10% each in both bond andcash investments. Conversely, if the stock market is expected toperform poorly, the fund would decrease its stock holdings.

Dynamic Fund of Funds

Portfolio disclosure will be limited to details of underlyingschemes and will not include investments made by these Schemes.Dynamic asset allocation may result in higher transaction costs.Since Scheme may invest predominantly in diversified Large Cap

Equity or Liquid Schemes of Mutual Funds registered with SEBI,its performance may depend on that of these underlying schemes.Dynamic asset allocation may result in higher transaction costs.The Scheme is closed-ended; investors can redeem units onlyduring the last three business days of every third month from thedate of allotment of units, at NAV- related prices.

Portfolio disclosure will be limited to details of underlying

schemes and will not include investments made by these Schemes.Dynamic asset allocation may result in higher transaction costs.Since Scheme may invest predominantly in Diversified Equityschemes and Liquid/ Short Term / Floating Rate Schemes ofMutual Funds registered with SEBI, its performance may dependon that of these underlying schemes.


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IMPORTANT TERMINOLOGIES

Capitalization

Fund managers and other investment professionals have varyingdefinitions of mid-cap, and large-cap ranges.

Growth vs. Value

Another distinction is made between growth funds, which invest instocks of companies that have the potential for large capital gains,and value funds, which concentrate on stocks that are undervalued.Value stocks have historically produced higher returns; however,financial theory states this is compensation for their greater risk.Growth funds tend not to pay regular dividends. Income funds tendto be more conservative investments, with a focus on stocks thatpay dividends. A balanced fund may use a combination ofstrategies, typically including some level of investment in bonds,

to stay more conservative when it comes to risk, yet aim for somegrowth.

Index funds Vs Active

Management An index fund maintains investments in companiesthat are part of major stock (or bond) indices, such as the S&P 500,

while an actively managed fund attempts to outperform a relevantindex through superior stock-picking techniques. The assets of anindex fund are managed to closely approximate the performance ofa particular published index. Since the composition of an indexchanges infrequently, an index fund manager makes fewer trades,on average, than does an active fund manager. For this reason,


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index funds generally have lower trading expenses than activelymanaged funds, and typically incur fewer short-term capital gainswhich must be passed on to shareholders. Additionally, indexfunds do not incur expenses to pay for selection of individual

stocks (proprietary selection techniques, research, etc.) anddeciding when to buy, hold or sell individual holdings. Instead, afairly simple computer model can identify whatever changes areneeded to bring the fund back into agreement with its target index.

Certain empirical evidence seems to illustrate that mutual funds donot beat the market and actively managed mutual funds under-perform other broad-based portfolios with similar characteristics.

One study found that nearly 1,500 U.S. mutual funds under-performed the market in approximately half of the years between1962 and 1992. Moreover, funds that performed well in the pastare not able to beat the market again in the future (shown byJensen, 1968; Grimblatt and Sheridan Titman, 1989).

Risk Factors

Mutual funds, like securities investments, are subject to marketrisks and there is no guarantee against loss in the Scheme or thatthe Scheme's objectives will be achieved.

As with any investment in securities, the NAV of the Units issuedunder the Scheme can go up or down depending on various factorsand forces affecting capital markets.

Past performance of the Sponsor or the AMC or the mutual fundsmanaged by the Sponsor does not indicate the future performanceof the Scheme.

Investments in the Scheme will be affected by trading volumes,settlement periods, volatility, price fluctuations, inability to sell


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securities, disinvestment of holdings of any unlisted stocks prior totarget date of disinvestment, credit risk and interest rate risk andthe risks associated with investments in derivatives.

Specific Risk Factor

The investors of the Scheme shall bear the recurring expenses ofthe Scheme in addition to the expenses of the underlying schemes.Hence the investor under the Scheme may receive lower pre-taxreturns than what they may receive if they had invested directly inthe underlying schemes in the same proportions. The portfolio

disclosure of the Scheme will be limited to providing theparticulars of the underlying schemes where the Scheme hasinvested and will not include the investments made by theunderlying schemes. Since the Scheme proposes to invest at leastin 5 underlying schemes, the significant underperformance in evenone of the underlying schemes may adversely affect theperformance of the Scheme. Investments in underlying equity/debtschemes will have all the risks associated with such schemes.

Expenses and TER's

Mutual funds bear expenses similar to other companies. The feestructure of a mutual fund can be divided into two or three maincomponents: management fee, non- management expense. Allexpenses are expressed as a percentage of the average daily netassets of the fund.


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Management fees

The management fee for the fund is usually synonymous with thecontractual investment advisory fee charged for the management of

a fund's investments. However, as many fund companies includeadministrative fees in the advisory fee component, whenattempting to compare the total management expenses of differentfunds, it is helpful to define management fee as equal to thecontractual advisory fee + the contractual administrator fee. This"levels the playing field" when comparing management feecomponents across multiple funds.

Contractual advisory fees may be structured as "flat-rate" fees, i.e.,a single fee charged to the fund, regardless of the asset size of thefund. However, many funds have contractual fees which includebreakpoints, so that as the value of a fund's assets increases, theadvisory fee paid decreases. Another way in which the advisoryfees remain competitive is by structuring the fee so that it is basedon the value of all of the assets of a group or a complex of fundsrather than those of a single fund.

Non-management expenses

Apart from the management fee, there are certain non-managementexpenses which most funds must pay. Some of the more significant(in terms of amount) non- management expenses are: transferagent expenses (this is usually the person you get on the other endof the phone line when you want to purchase/sell shares of a fund),custodian expense (the fund's assets are kept in custody by a bankwhich charges a custody fee), legal/audit expense, fund accountingexpense, registration expense (the SEC charges a registration feewhen funds file registration statements with it), board ofdirectors/trustees expense (the disinterested members of the board


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who oversee the fund are usually paid a fee for their time spent atmeetings), and printing and postage expense (incurred whenprinting and delivering shareholder reports).

Investor fees and expenses

Fees and expenses borne by the investor vary based on thearrangement made with the investor's broker. Sales loads (orcontingent deferred sales loads (CDSL)) are not included in thefund's total expense ratio (TER) because they do not pass throughthe statement of operations for the fund. Additionally, funds may

charge early redemption fees to discourage investors fromswapping money into and out of the fund quickly, which may forcethe fund to make bad trades to obtain the necessary liquidity. Forexample, Fidelity Diversified International Fund (FDIVX) chargesa 1 percent fee on money removed from the fund in less than 30days.

Brokerage commissions

An additional expense which does not pass through the statementof operations and cannot be controlled by the investor is brokeragecommissions. Brokerage commissions are incorporated into theprice of the fund and are reported usually 3 months after the fund'sannual report in the statement of additional information. Brokeragecommissions are directly related to portfolio turnover (portfolio

turnover refers to the number of times the fund's assets are boughtand sold over the course of a year). Usually the higher the rate ofthe portfolio turnover, the higher the brokerage commissions. Theadvisors of mutual fund companies are required to achieve "bestexecution" through brokerage arrangements so that thecommissions charged to the fund will not be excessive.


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SEBI REGULATIONS ON MUTUAL

FUNDS:

The Government brought Mutual Funds in the Securities marketunder the regulatory framework of the Securities and Exchangeboard of India (SEBI) in the year 1993. SEBI issued guidelines inthe year 1991 and comprehensive set of regulations relating to theorganization and management of Mutual Funds in 1993.

SEBI REGULATIONS 1993 (20.1.1993)

The regulations bar Mutual Funds from options trading, shortselling and carrying forward transactions in securities. The MutualFunds have been permitted to invest only in transferable securitiesin the money and capital markets or any privately placeddebentures or securities debt. Restrictions have also been placed onthem to ensure that investments under an individual scheme, do not

exceed five per cent and investment in all the schemes put togetherdoes not exceed 10 per cent of the corpus. Investments under allthe schemes cannot exceed 15 per cent of the funds in the sharesand debentures of a single company.

SEBI grants registration to only those mutual funds that can provean efficient and orderly conduct of business. The track record ofsponsors, a minimum experience of five years in the relevant fieldof Investment, financial services, integrity in business transactions

and financial soundness are taken into account. The regulationsalso prescribe the advertisement code for the marketing schemes ofMutual Funds, the contents of the trust deed, the investmentmanagement agreement and the scheme-wise balance sheet.Mutual Funds are required to be formed as trusts and managed byseparately formed as trusts and managed by separately formed


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Asset Management Companies (AMC). The minimum net worth ofsuch AMC is stipulated at Rs.5 crores of which, the Mutual Fundshould have a custodian who is not associated in any way with theAMC and registered with the SEBI.

The minimum amount raised in closed-ended scheme should beRs.20 Crores and for the open- ended scheme, Rs.50 Crores. Incase, the amount collected falls short of the minimum prescribed,the entire amount should be refunded not later than six weeks fromthe date of closure of the scheme. If this is not done, the fund isrequired to pay an interest at the rate of15 per cent per annum fromthe date of expiry of six weeks. In addition to these, the Mutual

Funds are obliged to maintain books of accounts and provision fordepreciation and bad debts. Further, the Mutual Funds are nowunder the obligation to publish scheme-wise annual reports, furnishsix month un-audited accounts, quarterly statements of themovements of the net asset value and quarterly portfoliostatements to the SEBI. There is also a stipulation that the MutualFunds should ensure adequate disclosures to the investors. SEBIhas agreed to let the Mutual Funds buy back the units of theirschemes.

However, the funds cannot advertise this facility in theirprospectus. SEBI is also empowered to appoint an auditor toinvestigate into the books of accounts or the affairs of the MutualFunds. SEBI can suspend the registration of Mutual Funds in thecase of deliberate manipulation, price rigging or deterioration ofthe financial position of Mutual Funds.

SEBI REGULATIONS, 1996

SEBI announced the amended Mutual Fund Regulations onDecember 9, 1996 covering Registration of Mutual Funds,Constitution and Management of Mutual funds and Operation of


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Trustees, Constitution and Management of Asset ManagementCompanies (AMCs) and custodian schemes of MFs, investmentobjectives and valuation policies, general obligations, inspectionand audit. The revision has been carried out with the objective of

improving investor protection, imparting a greater degree offlexibility and promoting innovation.

The increase in the number of MFs and the types of schemesoffered by them necessitated uniform norms for valuation ofinvestments and accounting practices in order to enable theinvestors to judge their performance on a comparable basis. TheMutual Fund regulations issued in December 1996 provide for a

scheme-wise report and justification of performance, disclosure oflarge investments which constitute a significant portion of theportfolio and disclosure of the movements in the unit capital. Theexisting Asset Management Companies are required to increasetheir net worth from Rs.10 crores within one year from the date ofnotification of the amended guidelines. AMCs are also allowed todo other fund-based businesses such as providing investmentmanagement services to offshore funds, other Mutual Funds,Venture Capital Funds and Insurance Companies. The amendedguidelines retained the former fee structure of the AMCs of 1.25%of weekly average Net Asset Value (NAV) up to Rs.100 crores and1% of NAV for net assets in excess of Rs.100 crores.

The consent of the investors has to be obtained for bringing aboutany change in the fundamental attributes of the scheme on thebasis of which the unit holders had made initial investments. Theregulation empowers the investor. The amended guidelines require

portfolio disclosure, standardization of accounting policies,valuation norms for NAV and pricing. The regulations also soughtto address the areas of misuse of funds by introducing prohibitionsand restrictions on affiliate transactions and investment exposuresto companies belonging to the group of sponsors of mutual funds.The payment of early bird incentive for various schemes has been


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allowed provided they are viewed as interest payment of early birdincentive for early investment with full disclosure.

The various Mutual Funds are allowed to mention an indicative

return for schemes for fixed income securities. In 1998-99 theMutual Funds Regulation were amended to permit Mutual Fundsto trade in derivatives for the purpose of hedging and portfoliobalancing. SEBI registered Mutual Funds and Fund managers arepermitted to invest in overseas markets, initially within an overalllimit of US $500 million and a ceiling for an individual fund atUS$ 50 million.

SEBI made (October 8, 1999) investment guidelines for MFs morestringent. The new guidelines restrict MFs to invest no more than10% of NAV of a scheme in share or share related instruments of asingle company. MFs in rated debt instruments of a single issue isrestricted to 15% of NAV of the scheme (up to 20% with priorapproval of Board of Trustees or AMC), restrictions in un- rateddebt instruments and in shares of unlisted companies.

The new norms also specify a maximum limit of 25% of NAV forany scheme for investment in listed group companies as against anumbrella limit of 25% of NAV of all schemes taken togetherearlier. SEBI increased (June 7, 2000) the maximum investmentlimit for MFs in listed companies from 5% to 10% of NAV inrespect of open-ended funds. Changes in fundamental attributes ofa scheme was also allowed without the consent of three fourths ofunit holders provided the unit holders are given the exit option atNAV without any exit load.

MFs are also not to make assurance or claim that is likely tomislead investors. They are also banned from making claims inadvertisement based on past performance.


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Comparison of Mutual Funds with otherproducts/investment opportunities:

The mutual fund sector operates under stricter regulations ascompared to most other investment avenues. Apart from the taxefficiency and legal comfort how do mutual funds compare withother products? Here the investment in Mutual Funds is comparedwith:

1. Company Fixed Deposits.

2. Bank Fixed Deposits.3. Bonds and Debentures.4. Equity.5. Life Insurance

1.Company Fixed Deposits versus Mutual Funds

Fixed deposits are unsecured borrowings by the companyaccepting the deposits. Credit rating of the fixed depositprogram is an indication of the inherent default risk in theinvestment.

The moneys of investors in a mutual fund scheme are investedby the AMC in specific investments under that scheme. Theseinvestments are held and managed in- trust for the benefit ofschemes investors. On the other hand, there is no such direct

correlation between a companys fixed deposit mobilization,and the avenues where these resources are deployed. Acorollary of such linkage between mobilization and investmentis that the gains and losses from the mutual fund schemeentirely flow through to the investors. Therefore, there can beno certainty of yield, unless a named guarantor assures a return


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or, to a lesserextent, if the investment is in a serial gilt scheme.On the other hand, the return under a fixed deposit is certain,subject only to the default risk of the borrower.

Both fixed deposits and mutual funds offer liquidity, but subjectto some differences:

The provider of liquidity in the case of fixed deposits is theborrowing company. In mutual funds, the liquidity provider isthe scheme itself (for open-end schemes) or the market (in thecase of closed-end schemes).

The basic value at which fixed deposits are en-cashed is notsubject to market risk. However, the value at which units of ascheme are redeemed entirely depends on the market. Ifsecurities have gained in value during the period, then theinvestor can even earn a return that is higher than what sheanticipated when she invested. Conversely, she could also endup with a loss.

Early encashment of fixed deposits is always subject to apenalty charged by the company that accepted the fixed deposit.Mutual fund schemes also have the option of charging a penaltyon early redemption of units (by way of an exit load). If theNAV has appreciated adequately, then despite the exit load, theinvestor could earn a capital gain on her investment.

2.Bank Fixed Deposits versus Mutual Funds

Bank fixed deposits are similar to company fixed deposits. Themajor difference is that banks are more stringently regulatedthan are companies. They even operate under stricterrequirements regarding Statutory Liquidity Ratio (SLR) andCash Reserve Ratio (CRR). While the above are causes for


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It is possible for an astute investor to earn attractive returns bydirectly investing in the debt market, and actively managing thepositions. Given the market realities in India, it is difficult formost investors to actively manage their debt portfolio. Further,

at times, it is difficult to execute trades in the debt market evenwhen the transaction size is as high as Rs 1 crore. In thisrespect, investment in a debt scheme would be beneficial.

Debt securities could be backed by a hypothecation or mortgageof identified fixed and or current assets (secured bonds /debentures). In such a case, if there is a default, the identifiedassets become available for meeting redemption requirements.

An unsecured bond/ debenture is for all practical purposes like afixed deposit, as far as access to assets is concerned.

The investment in mutual fund scheme is held by a Custodianfor the benefit of all investors in that scheme. Thus, thesecurities that relate to a scheme are ring-fenced for the benefitof its investors.

4.Equity versus Mutual Funds

Investment in both equity and mutual funds are subject tomarket risk. An investor holding an equity security that is nottraded in the market place has a problem in realizing value fromit. But investment in an open-end mutual fund eliminates thisdirect risk of not being able to sell the investment in the market.An indirect risk remains, because the scheme has to realize its

investments to pay investors. The AMC is however in a betterposition to handle the situation.

Another benefit of equity mutual fund schemes is that they giveinvestors the benefit of portfolio diversification through a small


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investment. For instance, an investor can take an exposure to theindex by investing a mere Rs 5,000 in an index fund.

5.Life Insurance versus Mutual Funds

Life insurance is a hedge against risk and not really aninvestment option. So, it would be wrong to compare lifeinsurance against any other financial product. Occasionally onaccount of market inefficiencies or mis-pricing of products inIndia, life insurance products have offered a return that is higherthan a comparable safe fixed return security thus, you are

effectively paid for getting insured! Such opportunities are notsustainable in the long run.


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FUTURE OF MUTUAL FUNDS IN

INDIA

At the end of 2006 March, Indian mutual fund industry reached Rs.2, 57, 499 crores. It is estimated that by 2010 March-end, the totalassets of all scheduled commercial banks should be Rs. 40, 90, 000crores.

The annual composite rate of growth is expected 13.4% during therest of the decade. In the last 5 years we have seen annual growth

rate of 9%. According to the current growth rate, by year 2010,mutual fund assets will be double.

Going by the above facts and generally, mutual funds have oftenbeen considered a good route to invest and earn returns withreasonable safety. Small and big investors have both invested ininstruments that have suited their needs. And so equity and debtfunds have attracted investments alike. The performance of theinvestments, equity in particular, for the last one-year, has howeverbeen disappointing for the investors.

The fall in NAVs of equity funds, and it is really steep in some,even to the extent of 60-70 percent, has left investors disgusted.Such backlash was only to be expected when funds, in a hurry topost good returns invested in volatile tech stocks. The move,though good under conducive market conditions, is the point ofrebuttal now. Owing to volatility in market and profit warnings by

some IT majors, tech stocks have been on the downhill journey andthe result is fall in NAVs of most equity funds.

This hurts the investor but then investments in equity are neversafe. Mutual funds are not just guilty of mismanaging their risks asthe recent survey by Pricewaterhouse Coopers indicates but also


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not educating their investors enough on the risks facing them. It isfor the mutual benefit of the investors as well as mutual funds thatinvestor is educated enough or else an agitated investor might routehis investments to other avenues that are considered safe. Debt

funds are safe investments and generate returns far in excess ofwhat other so-called safe avenues such as banks generate. Despitethis, the inflow of funds in debt funds and banks is by no meanscomparable. The factor contributing to this is the lack ofunderstanding caused by improper guidance by the intermediaries.

Till now, Investor education has been one of the issues, less caredfor, by the industry. The industry focused upon the amounts and

not why a person wanted to invest or whether a particular productsuited him or not. While educating the customer might not havebeen on the cards earlier, the things are beginning to change now.

With SEBI passing on the guidelines, the funds will engage ininvestor education. The guidelines state that funds will utilize theincome earned on unclaimed money lying with them for a periodexceeding three years to educate the investors. AMFI has started acertification program for intermediaries. This will be mademandatory for the intermediaries and is aimed at educating theinvestors about the risks attached to the schemes and to inculcateadequate skills into the intermediaries to help the investors choosethe right kind of fund. Steps such as these are aimed at obliteratingvarious flaws in the system by standardizing the knowledge base ofintermediaries, as they are the interface between the investor andthe funds.

Although the investors themselves are also guilty of picking fundsthat were not suited for them, the blame cant lie square on theirshoulders alone. The industry has also got to bear some of it. Withsuch programs becoming mandatory, it can be ensured to someextent that ignorance ceases to be an aspect associated with theindustry.


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Till now, investors have been ignorant about the kind of fund to bepicked or how to select a fund. Teaching an investor how to selecta fund is thus an important aspect. Educated investors can, on theirpart, ask pertinent questions to find funds that qualify to be in their

portfolio as per their risk bearing capacity.

It would not be improper to say that investor education is still thekey to managing the funds handed over by investors. The investorsare important to the industry and likewise, mutual funds form animportant avenue for an investor. It would thus be of criticalimportance to educate people for an informed investor is in thebest position to pick up Schemes as per his need. This would also

infuse some confidence in the minds of the investors who underthe current scenario seem to be losing faith on account of the fallssuffered in recent times.

An educated and informed intermediary stands the best chance ofunderstanding the needs of the client and also of winning hisconfidence through proper guidance. As it is, investor educationwill remain a key issue for mutual funds in the longer run andeducating the intermediaries will be the first step towards it.


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NEED AND SCOPE OF THE STUDY

NEED FOR THE STUDY:

The evaluation study of risk and returns of Equity Schemes ofdifferent Mutual Funds is useful to know the performance ofschemes and it helps the investors to invest in Mutual Fundschemes Equity.The performance of different schemes however helps theprospective investors to choose the best scheme that suits his

objective.

SCOPE OF THE STUDY:

The study was limited to just finding the risk and returnsassociated with the schemes. The study covers the schemes provided by six differentcompanies. The study covers the period of past two years from January 2007to January 2009. The study covers only the open-ended funds.

LIMITATIONS OF THE STUDY:

The study was limited only to six companies.

Time duration for the study was very short as it was restricted tojust two years.The study was limited to the extent of just finding the risks andreturns of each Scheme.


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PRODUCT PROFILE

Tata Equity Management Fund

Objective: Tata Equity Management Fund seeks to generate capitalappreciation & provide long term growth opportunities byinvesting in a portfolio constituted of equity & equity relatedinstruments and to generate consistent returns by investing in debtand money market securities.

Structure: Open-ended Equity Fund

Inception Date: May 15, 2006

Plans and Options under the Plan: Growth, Dividend

Face Value (Rs/Unit): Rs. 10

Minimum Investment: Rs. 5000

Entry Load: Nil.

Exit Load: In case of redemption before expiry of close endedperiod, proportionate unamortized NFO expenses will be recoveredfrom the redemption proceeds of the investors.

Birla SunLife Equity Plan

Objective: To provide growth along with tax benefits to investors.

Structure: Open Ended Inception Date : February 16, 1999


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Plans and Options under the Plan : Dividend and Growth Option.


Minimum Investment: Rs.5000

Entry Load: 2.25% for amount < 5 crores. Nil, for amount > 5crore.

Exit Load: Nil.

DWS Alpha Equity Fund

Objective: The fund seeks to achieve capital appreciation throughinvestment in Asian companies (excluding Japan), which havehigh growth potential.

Structure: Open ended scheme.

Inception Date: January 16, 2008

Plans and Options under the Plan: Growth and Dividend options.

Face Value (Rs/Unit): Rs 10

Minimum Investment: Rs 5000/-

Entry Load: 2.25% for less than 5 crores.

Exit Load: For less than 5 crores- 1% if redeemed within 6months, 0.5% if redeemed after 6 months but within 1 year. Forgreater than 5 crores but less than 25 crores-1% if redeemed within6 months. Greater than 25 crores- Nil


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HSBC Equity Fund

Objective: HSBC Equity Fund (HEF) aims to generate long termcapital growth from an actively managed portfolio of equity and

equity related securities.

Structure: Open-ended Equity Scheme

Inception Date: December 03, 2002

Plans and Options under the Plan: Open-ended Equity Scheme


Minimum Investment: Rs.5000

Entry Load: For investments below Rs. 5 crores, Entry load is2.25%. For Investments of Rs. 5 crores and above, Entry Load isNil.

Exit Load: If redeemed before 6 Months; and Amount less than 5crores, Exit load is 0.5%. For Amount greater than 5 crore, Exitload is Nil.

LIC MF Equity Fund

Objective: LIC MF Equity Fund seeks to obtain maximum possiblecapital growth consistent with reasonable levels of safety andsecurity by investing the funds mainly in equities and also in debtsand other permitted instruments of capital and money market.

Structure: Open-ended Equity Scheme Inception Date: January 11,1993


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Plans and Options under the Plan : Growth, Dividend.

Face Value (Rs/Unit): Rs. 10 Minimum Investment: Rs. 2000

Entry Load: For investments below Rs.1 crore, Entry load is2.25%. For Investments of Rs. 1 crore and above, Entry Load isNil.

Exit Load: Nil.

UTI Equity Fund

Objective: Capital appreciation through investments in Equitiesand Equity related instruments, convertible debentures, derivativesin India and also in overseas markets.

Structure: Open Ended Equity Fund

Inception Date: April 20, 1992 Plans and Options under the Plan:

Plans and Options under the Plan : Growth Option, IncomeOption


Minimum Investment: Rs. 5,000/-

Entry Load: 2.25% for < Rs.2 crores; Nil for >= Rs.2 crores.

Exit Load: Nil.


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DESIGN OF THE STUDY

INTRODUCTION:

A detail study is done on Equity Schemes provided by six MutualFund Companies. Analysis is done on the Risk and Returns ofEquity Scheme provided by the organization, where it is useful tothe investors to mobilize the savings in the respective schemesprovided by the Company.

RESEARCH DESIGN:

A Research design is a method and procedure for acquiringinformation needed to solve the problem. A research design is thebasic plan that helps in the data collection or analysis. It specifiesthe type of information to be collected the sources and datacollection procedure.

METHOD OF RESEARCH DESIGN USED UNDER

STUDY IS:

DESCRIPTIVE RESEARCH

Descriptive research is study of existing facts to come to a

conclusion. In this research an attempt has been made to analyzethe past performance of the equity schemes and to know thebenefits to the investors. The study is done on equity schemesprovided by six companies to know the companys performancefor the past two years and to know the risk and returns of thefunds.


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OPERATIONAL DEFINITIONS OF

THE CONCEPT

RISK:

The dictionary meaning of risk is the possibility of loss or injury.Any rational investor, before investing his/her investible wealth inthe security, analyzes the risk associated with a particular security.The actual return he receives from a security may vary from hisexpected return and the risk is expressed in term of variability of

return. The down side of risk may be caused by several factors,either common to all securities or specific to a particular security.

Investor in general would like to analyze the risk factors and athrough knowledge of a risk helps him to plan his portfolio in sucha manner so as to minimize risk associated with the investment.

Risk consists of two components:

The systematic risk. The unsystematic risk.

The systematic risk is caused by the factors external to a particularcompany and uncontrollable by the company. The systematic riskaffects the market as a whole.

In case of unsystematic risk the factors are specific, unique and

related to a particular industry or company.


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Systematic Risk:

The systematic risk affects the entire market. The economicconditions, political situations and the sociological changes affect

the security market. These factors are beyond the control of thecorporate and the investor. The investor cannot avoid them.

This is subdivided into:

i. Market Riskii. Interest Rate Riskiii. Purchasing Power Risk.

Unsystematic Risk:

The unsystematic risk is unique and peculiar to a firm or anindustry. Unsystematic Risk stems from managerial inefficiency,technological change in the production process, availability of rawmaterial changes in the customer preference, and labor problems.

The nature and magnitude of the above-mentioned factors differfrom industry to industry, and company to company. They have tobe analyzed separately for each industry and firm. Broadly,unsystematic risk can be classified into:

i. Business Riskii. Financial Risk

Risk Measurement:

Understanding the nature of risk is not adequate unless the investoror analyst is capable of expressing it in some quantitative terms.Measurements cannot be assured of cent percent accuracy because


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risk is caused by numerous factors such as social, political,economic and managerial efficiency. The statistical tools used toquantify risk are:

i. Standard Deviation:

a. A measure of the dispersion of a set of data from its mean. Themore spread apart the data is, the higher the deviation.

b. In finance, standard deviation is applied to the annual rate ofreturn of an investment to measure the investment's volatility(risk).

A volatile stock would have a high standard deviation. In mutualfunds, the standard deviation tells us how much the return on thefund is deviating from the expected normal returns. Standarddeviation can also be calculated as the square root of the variance.

ii. Beta:

Beta describes the relationship between the securities return andthe index returns.

Beta = + 1.0One percent change in market index returns causes exactly onepercent change in the security return. It indicates that the securitymoves in tandem with the market.

Beta = + 0.5One percent change in the market index return causes 0.5 percentchange in the security return. The security is less volatile comparedto the market.


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Beta = + 2.0One percent change in the market index return causes 2 percentchange in the security return. The security return is more volatile.When there is a decline of 10% in the market return, the security

with beta of 2 would give a negative return of 20%. The securitywith more than 1 beta value is considered to be risky.

Negative BetaNegative beta value indicates that the security return moves in theopposite direction to the market return. A security with a negativebeta of -1 would provide a return of 10%, if the market returndeclines by 10% and vice-versa.

RATE OF RETURN:

The compounded annual return on a mutual fund schemerepresents the return to investors from a scheme since the date ofissue. It is calculated on NAV basis or price basis. On NAV basisit reflects the return generated by the fund manager on NAV. On

price basis it reflects the return to investors by way of market orrepurchase price

Net Asset Value (NAV):

The net asset value of the fund is the cumulative market value ofthe assets fund of its liabilities. In other words, if the fund isdissolved or liquidated, by selling off all the assets in the fund, thisis the amount that the shareholders would collectively own. Thisgives rise to the concept of net asset value per unit, which is thevalue, represented by the ownership of one unit in the fund. It iscalculated simply by dividing the net asset value of the fund bythenumber of units. However, most people refer loosely to the


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NAV per unit as NAV, ignoring the per unit. We also abide bythe same convention.

Computation of Net Asset Value

The Net Asset Value (NAV) of the units will be determined as ofevery working day and for such other days as may be required forthe purpose of transaction of units. The NAV shall be calculated inaccordance with the following formula, or such other formula asmay be prescribed by SEBI from time to time.

NAV =Market Fair value of schemes investments + Receivables

+ Accrued Income + Other Assets Accrued Expenses Payables Other Liabilities /Number of Units Outstanding


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METHODOLOGY OF DATA

COLLECTION:

SOURCES OF DATA

SECONDARY DATA used for the study:

Internet sources.

Newspapers.

Announcements and publishings by the company.


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TOOLS & TECHNIQUES USED FOR

THE STUDY

To analyze the data in the project various statistical tools are used.They are:

i. Beta:

= NXY - (X)( Y) / N(Y*Y) - ( Y)^2

= Beta of the fund;

N = Number of Observations;X = Weekly return of NAV;Y = Weekly return of the Index.

ii. Standard Deviation:

= ((d^2)/N - (d/N)^2)^1/2d = (X - (X/N))

Where = Standard Deviation;N = Number of observations;d = Deviations from actual mean;

iii. Rate of Return for a period:

X = B-A+D/B

Where,A = NAV at the end of the period of the period;


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B = NAV at the beginning of the period;D = Dividend paid during the period;

iv. Analysis of Variance (ANOVA):

ANOVA has been conducted using inbuilt function of MicrosoftExcel. Single factor ANOVA has been used for this purpose. If F-value is less than tabulated, then we accept the null hypothesis. Weare using 5% Level of Significance. Annova is used to see if thereis a significant difference between the returns of the schemes.


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EVALUATION OF PORTFOLIO

PERFORMANCE:

Composite Equity Portfolio Performance Measures

As late as the mid 1960s investors evaluated PM performancebased solely on the rate of return. They were aware of risk, butdidn't know how to measure it or adjust for it. Some investigatorsdivided portfolios into similar risk classes (based upon a measureof risk such as the variance of return) and then compared the

returns for alternative portfolios within the same risk class.

We shall look at some measures of composite performance thatcombine risk and return levels into a single value.

Treynor Portfolio Performance Measure

This measure was developed by Jack Treynor in 1965. Treynor(helped developed CAPM) argues that, using the characteristicline, one can determine the relationship between a security and themarket. Deviations from the characteristic line (unique returns)should cancel out if you have a fully diversified portfolio.

Treynor's Composite Performance Measure: He was interested in aperformance measure that would apply to ALL investors regardless

of their risk preferences. He argued that investors would prefer aCML with a higher slope (as it would place them on a higherutility curve). The slope of this portfolio possibility line is:

Treynor Ratio = (ARp-ARf)/B


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A larger Ti value indicates a larger slope and a better portfolio forall investors regardless of their risk preferences. The numeratorrepresents the risk premium and the denominator represents therisk of the portfolio; thus the value, T, represents the portfolio's

return per unit of systematic risk. All risk averse investors wouldwant to maximize this value.

The Treynor measure only measures systematic risk--itautomatically assumes an adequately diversified portfolio.

We can compare the T measures for different portfolios. Thehigher the T value, the better the portfolio performance. For

instance, the T value for the market is:

Ti = (ARp-ARf)/B

In this expression, < m = 1.

Demonstration of Comparative Treynor Measures: Assume thatwe are an administrator of a large pension fund (i.e. Terry Teagueof Boeing) and we are trying to decide whether to renew contractswith our three money managers. We must measure how they haveperformed. Assuming we have the following results for eachindividual's performance:

Investment managerAvg. annual rate of

returnBeta

Z 0.12 0.9

B 0.16 1.05Y 0.18 1.2

We can calculate the T values for each investment manager:Tm = (0.14 0.08)/1.00 = 0.06


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TZ = (0.12 0.08)/0.09 = 0.044TB = (0.16 0.08)/1.05 = 0.076TY = (0.18 0.08)/1.20 = 0.083

These results show that Z did not even "beat-the-market." Y hadthe best performance, and both B and Y beat the market. [To findrequired return, the line is: .08 + .06(Beta) ]

One can achieve a negative T value if you achieve very poorperformance or very good performance with low risk. For instance,if you had a positive beta portfolio but your return was less thanthat of the risk-free rate (which implies you weren't adequately

diversified or that the market performed poorly) then you wouldhave a (-) T value. If you have a negative beta portfolio and youearn a return higher than the risk-free rate, then you would have ahigh T-value. Negative T values can be confusing, thus you maybe better off plotting the values on the SML or using the CAPM (inthis case, .08+.06(Beta)) to calculate the required return andcompare it with the actual return.

Sharpe Portfolio Performance Measure

This measure was developed in 1966. It is as follows:

Si=(ARp-ARf)/std dev

It is VERY similar to Treynor's measure, except it uses the totalrisk of the portfolio rather than just the systematic risk. The Sharpe

measure calculates the risk premium earned per unit of total risk.In theory, the S measure compares portfolios on the CML, whereasthe T measure compares portfolios on the SML

Demonstration of Comparative Sharpe Measures:


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Sample returns an SDs for four nd portfolios (and the calculatedSharpe Index) are given below:

PortfolioAvg. annual rate

of return

SD of

Return

Sharpe

Measure

B 0.13 0.18 0.278

O 0.17 0.22 0.409

P 0.16 0.23 0.348

MARKET 0.14 0.2 0.3

Thus, portfolio O did the best, and B failed to beat the market. We

could draw the CML given this information: CML=.08 + (0.30)ation: (0.30)SD

Treynor Measure vs. Sharpe Measure. The Sharpe measureevaluates the portfolio manager on the basis of both rate of returnand diversification (as it considers total portfolio risk in thedenominator). If we had a fully diversified portfolio, then both theinator). Sharpe and Treynor measures should given us the sameranking. A poorly diversified asures portfolio could have a higher

ranking under the Treynor measure than for the Sharpe measure.

Jenson Portfolio Performance

Measure This measure (as are all the previous measures) is basedon the CAPM: We can express the expectations formula (the aboveformula) in terms of realized rates of return by adding an error

term to reflect the difference between E(Rj) vs actual Rj:

Rp RFR + beta(Rm-RFR)

, By subtracting the risk free rate from both sides,


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p rp [rfp (rM rf)]

we get: Using this format, one would not expect an intercept in theregression. However, if we had superior portfolio managers who

were actively seeking o undervalued out securities, they could earna higher risk-adjusted return than those implied in the model. So, ifwe examined returns of superior portfolios, they would have asignificant positi intercept. positive An inferior manager wouldhave a significant negative intercept. A manager that was notanager clearly superior or inferior woul have a statisticallyinsignificant intercept. We would test ld the constant, or intercept,in the following regression:

p rp [rfp (rM rf)]

This constant term would tell us how much of the return isattributable to the manager's ability to derive above-averagereturns adjusted for risk.

Applying the Jenson Measure. This requires that you use a

different risk risk-free rate for each time interval during the sasample period. You must subtract the risk-free rate from the freereturns during each observation period rather than calculating theaverage return and average risk-free rate as in the Sharpe andTreynor measures. Also, the Jensen measure does not evaluate theability of the portfolio manager to diversify, as it calc calculatesrisk premiums in terms of systematic risk (beta). For evaluatingdiversified portfolios (such a atic most mutual funds) this isprobably adequate. Jensen finds that mutual fund returns aretypically correlated with the market at rates above 0.90.


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ANALYSIS AND INTEPRETATIONS


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NAV-Net Asset Value

(Closing month end values: Equity Funds)

TIME DEUTSCHE HSBC UTI LIC TATA

BIRLA

SUNLIFE

January 11.8178 73.0236 32.86 21.5973 11.339 183.53

February 12.3544 73.9072 33.62 22.5309 11.3209 188.79

March 10.6932 67.5688 31.06 19.6142 10.3624 172.01

April 10.9721 64.9581 29.64 18.4244 10.6306 167.37

May 12.1329 72.6258 33.21 21.0207 10.8756 187.76

June 12.2531 75.3107 34.94 21.2184 10.9052 203.87

July 12.3014 76.9942 34.98 21.5221 11.2891 209.45

August 12.6771 77.9247 35.06 21.9315 11.1341 212.68

September 13.0877 80.017 35.96 22.8593 11.5812 219.63

October 15.1709 89.453 40.16 25.6692 12.4419 242.73

November 16.7393 105.7896 44.57 30.8318 13.3582 269.86

December 17.1336 109.2251 45.11 32.8405 13.8287 283.85

January 17.6996 115.0424 48.33 34.8438 14.5373 308.33

February 15.4311 101.7038 42.13 28.6223 12.5876 254.44

March 14.3606 93.8314 39.98 26.4151 11.9001 234

April 13.8577 87.9695 37.94 22.313 11.0109 211.51

May 14.84 97.1612 41.24 26.21 12.0565 232.89

June 13.3027 91.8995 38.75 22.859 11.4104 215.16

July 11.9187 77.6541 32.34 19.2678 9.6343 172.22

August 13.1324 83.9529 35.32 21.7883 10.4812 188.61

September 12.8837 82.4644 35.87 21.2754 10.3467 189.22

October 11.4472 75.343 33.24 19.3474 9.2684 170.79

November 8.6122 60.6914 27.16 15.0982 7.8354 137.68

December 7.6261 55.5332 24.3 12.8871 7.1906 120.52

January 8.3681 60.5767 26.62 15.1599 7.9427 136.66


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BSE SENSEX

TIME INDEX

MARKET

RETURNS

(RM)

AVERAGEMARKET

RETURNS

(ARM) RM-ARM

(RM-

ARM)^2

JANUARY 14,090.92 -0.08 -0.04676 -0.0332 0.0011

FEBRUARY 12,938.09 0.0104 -0.04676 0.0571 0.0033

MARCH 13,072.10 0.0612 -0.04676 0.108 0.0117

APRIL 13,872.37 0.048 -0.04676 0.0948 0.009

MAY 14,544.46 0.0073 -0.04676 0.0541 0.0029

JUNE 14,650.51 0.0615 -0.04676 0.1083 0.0117JULY 15,550.99 -0.0149 -0.04676 0.0319 0.001

AUGUST 15,318.60 0.1288 -0.04676 0.1755 0.0308

SEPTEMBER 17291.1 0.1473 -0.04676 0.1941 0.0377

OCTOBER 19837.99 -0.0239 -0.04676 0.0228 0.0005

NOVEMBER 19363.19 0.0477 -0.04676 0.0945 0.0089

DECEMBER 20286.99 -0.13 -0.04676 -0.0833 0.0069

JANUARY 17648.71 -0.004 -0.04676 0.0428 0.0018

FEBRUARY 17578.72 -0.11 -0.04676 -0.0633 0.004MARCH 15644.44 0.105 -0.04676 0.1518 0.023

APRIL 17287.31 -0.0504 -0.04676 -0.0036 0

MAY 16,415.57 0.01799 -0.04676 0.0288 0.0008

JUNE 13,461.60 0.0664 -0.04676 0.1132 0.0128

JULY 14,355.75 0.0145 -0.04676 0.0613 0.0038

AUGUST 14,564.53 -0.117 -0.04676 -0.0702 0.0049

SEPTEMBER 12,860.43 -0.2389 -0.04676 -0.1921 0.0369

OCTOBER 9,788.06 -0.071 -0.04676 -0.0243 0.0006NOVEMBER 9,092.72 0.061 -0.04676 0.1078 0.0116

DECEMBER 9,647.31 -0.0231 -0.04676 0.0237 0.0006

JANUARY 9,424.24 -1 -0.04676 -0.9532 0.9087SUM(RM-

ARM)^2 1.135


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RISK FREE RATE

TIME RISK FREE RETURN (RF)

JANUARY 4.25

FEBRUARY 4.25

MARCH 4.25

APRIL 4.25

MAY 4.25

JUNE 4.25

JULY 4.25AUGUST 4.25

SEPTEMBER 4.25

OCTOBER 4.25

NOVEMBER 4.25

DECEMBER 4

JANUARY 4

FEBRUARY 4

MARCH 4

APRIL 3.75

MAY 3.75

JUNE 3.75

JULY 3.75

AUGUST 3.75

SEPTEMBER 3.75

OCTOBER 3.75

NOVEMBER 4.25

DECEMBER 4.25JANUARY 4.25

SUM RF 101.75

ARF 0.0424


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3.5

3.6

3.7

3.8

3.9

4

4.1

4.2

4.3

JANUAR

Y

MAR

CHMAY

JULY

SEPTE

MBE

R

NOVE

MBE

R

JANUAR

Y

MAR

CHMAY

JULY

SEPTE

MBE

R

NOVE

MBE

R

JANUAR

Y

TIME

RETUR

N

Series1

ABBREVITIONS

RM MARKET RETURNS

ARM AVERAGE MARKET RETURNS

RF RISK FREE RETURN

ARF AVERAGE RISK FREE RETURN

RP ASSET RETURN

ARP AVERAGE ASSET RETURN

SML SECURITIES MARKET LINE


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DEUTSCHE

TIME NAV RP ARPRP-ARP

RM-ARM

(RP-

ARP)*(RM-ARM)

(RP-ARP)^2

JANUARY 11.8178 0.045406 -0.051 0.0964-

0.03324 -0.0032 0.0093

FEBRUARY 12.3544 -0.13446 -0.051 -0.0835 0.0571 -0.0048 0.007

MARCH 10.6932 0.026082 -0.051 0.0771 0.108 0.0083 0.0059

APRIL 10.9721 0.105796 -0.051 0.1568 0.0948 0.0149 0.0246

MAY 12.1329 0.009907 -0.051 0.0609 0.0541 0.0033 0.0037

JUNE 12.2531 0.003942 -0.051 0.0549 0.1083 0.0059 0.003

JULY 12.3014 0.030541 -0.051 0.0815 0.0319 0.0026 0.0066

AUGUST 12.6771 0.032389 -0.051 0.0834 0.1755 0.0146 0.007

SEPTEMBER 13.0877 0.159172 -0.051 0.2102 0.1941 0.0408 0.0442

OCTOBER 15.1709 0.103382 -0.051 0.1544 0.0228 0.0035 0.0238

NOVEMBER 16.7393 0.023555 -0.051 0.0746 0.0945 0.007 0.0056

DECEMBER 17.1336 0.033035 -0.051 0.084 -0.0833 -0.007 0.0071

JANUARY 17.6996 -0.12817 -0.051 -0.0772 0.0428 -0.0033 0.006

FEBRUARY 15.4311 -0.06937 -0.051 -0.0184 -0.0633 0.0012 0.0003

MARCH 14.3606 -0.03502 -0.051 0.016 0.1518 0.0024 0.0003

APRIL 13.8577 0.070885 -0.051 0.1219 -0.0036 -0.0004 0.0149

MAY 14.84 -0.10359 -0.051 -0.0526 0.0288 -0.0015 0.0028

JUNE 13.3027 -0.10404 -0.051 -0.053 0.1132 -0.006 0.0028

JULY 11.9187 0.101832 -0.051 0.1528 0.0613 0.0094 0.0234

AUGUST 13.1324 -0.01894 -0.051 0.0321 -0.0702 -0.0023 0.001

SEPTEMBER 12.8837 -0.1115 -0.051 -0.0605 -0.1921 0.0116 0.0037OCTOBER 11.4472 -0.24766 -0.051 -0.1967 -0.0243 0.0048 0.0387

NOVEMBER 8.6122 -0.1145 -0.051 -0.0635 0.1078 -0.0068 0.004

DECEMBER 7.6261 0.097297 -0.051 0.1483 0.0237 0.0035 0.022

JANUARY 8.3681 -1 -0.051 -0.949 -0.9532 0.9046 0.9006

Sum 1.0032 1.1681


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Arp = -0.0510(Rm Arm)^2 = 1.1351

B = 0.8838Std Dev = 0.2206

Arm = -0.0468ARf = 0.0424

SML = -0.0364

Measures:

Treynor -0.1057

Sharpe -0.

Risk and Return Analysis of Equity Mutual Fund

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