ACKNOWLEDGEMENT

Project Report is the most vital part of an MBA course, I therefore, consider

myself fortunate to receive this Research report yet the opportunity could not have

been utilized without the guidance and support of many individuals who although

held varied positions, but were equally instrumental for successful completion of

my research report.

I would like to express gratitude to the respected Mr Shishir Shrivastava

Faculty Guide IGNU for their valuable inputs and direction that rendered

success to the project.

I owe a deep intellectual debt to all of them who through their rich &varied

contribution have greatly improved my understanding of various concepts of my

report.

Preface

The Indian capital market has been increasing tremendously during last few

years. With the reforms of economy, reforms of industrial policy, reforms of

public sector and reforms of financial sector, the economy has been opened up

and many developments have been taking place in the Indian money market and

capital market. The Sensex first crossed 6,000 on February 11, 2000, fuelled by

the IT boom, but closed below that mark. On November 23, 2004, it closed

above 6,000 for the first time. In order to help the small investors, SBI SBI

Mutual Fund industry has come to occupy an important place. The spread of the

banking system has been a major factor in promoting financial intermediation in

the economy and in the growth of financial savings. With progressive

liberalization of economic policies, there has been a rapid growth of capital

market, money market and financial services industry including merchant

banking, leasing and venture capital. Consistent with this evolution of the

financial sector, the SBI SBI Mutual Fund industry has also come to occupy an

important place.

In the FY2006 capital market has been riding on a roller coaster. In the month of

April this year the bullish run in the stock market has pushed the Sensex up

above the 12000 mark. On the 10th day of next month the Sensex touched it’s

best ever closing level of 12612. However, the slide started soon after it and the

Sensex fall from peak to trough in May with 2214 points.

This project, titled, “Awareness & Perception about SBI SBI SBI Mutual

Fund ” examines the effect these changes in stock markets are having on the

SBI SBI Mutual Funds, and to evaluate the performance of some SBI SBI

Mutual Fund schemes and to suggest what should be done to avoid any negative

effects the market is having on the SBI SBI Mutual Funds and the investors. In

this project we will also examine the role of distributors in influencing investor’s

decisions.

STUDENTS’ DECLARATION

I hereby declare that this project work is the result of our own research and no part

of it has been presented for another degree in this university or elsewhere. We are

solely responsible for any errors in the work.

DATE: SIGNATURE:

INTRODUCTION

Industry & company profile of SBI

State Bank of India is India’s largest commercial bank. State Bank of India has a

vast domestic network of over 9000 branches (approximately 14% of all bank

branches) and commands one fifth of deposits and loans of all scheduled

commercial bank of India. The State Bank Group includes a network of eight

banking subsidiaries and several non banking subsidiaries offering merchant

banking services, fund management, factoring services, primary dealership in

government securities, credit cards and insurance.

Roots

State bank of India traces its roots to the first decade of 19th century. When the

Bank of Calcutta, later renamed the Bank of Bengal, was established on 2June

1806.The government amalgamated namely the Bank of Bombay lei corporate on

15 April 1848 and the Bank of Madras 27 Jan 1921 and named the recognized

banking entity the Imperial Bank of India.

Time line

June, 2 1806 – the Bank of Calcutta established.

TRANSFORMATION JOURNEY IN STATE BANK OF INDIA

The State Bank of India, the country’s oldest Bank and a premier in terms of

balance sheet size, number of branches, market capitalization and profits is today

going through a momentous phase of Change and Transformation – the two

hundred year old Public sector behemoth is today stirring out of its Public Sector

legacy and moving with an agility to give the Private and Foreign Banks a run for

their money.

The bank is entering into many new businesses with strategic tie ups – Pension

Funds, General Insurance, Custodial Services, Private Equity, Mobile Banking,

Point of Sale Merchant Acquisition, Advisory Services, structured products etc –

each one of these initiatives having a huge potential for growth.

The Bank is forging ahead with cutting edge technology and innovative new

banking models, to expand its Rural Banking base, looking at the vast untapped

potential in the hinterland and proposes to cover 100,000 villages in the next two

years.

 

It is also focusing at the top end of the market, on whole sale banking capabilities

to provide India’s growing mid / large Corporate with a complete array of products

and services. It is consolidating its global treasury operations and entering into

structured products and derivative instruments. Today, the Bank is the largest

provider of infrastructure debt and the largest arranger of external commercial

borrowings in the country. It is the only Indian bank to feature in the Fortune 500

list.

The Bank is changing outdated front and back end processes to modern customer

friendly processes to help improve the total customer experience. With about 8500

of its own 10000 branches and another 5100 branches of its Associate Banks

already networked, today it offers the largest banking network to the Indian

customer. The Bank is also in the process of providing complete payment solution

to its clientele with its over 21000 ATMs, and other electronic channels such as

Internet banking, debit cards, mobile banking, etc.

With four national level Apex Training Colleges and 54 learning Centers spread all

over the country the Bank is continuously engaged in skill enhancement of its

employees. Some of the training programs are attended by bankers from banks in

other countries.

The bank is also looking at opportunities to grow in size in India as well as

internationally. It presently has 82 foreign offices in 32 countries across the globe.

It has also 7 Subsidiaries in India – SBI Capital Markets, SBICAP Securities, SBI

DFHI, SBI Factors, SBI Life and SBI Cards - forming a formidable group in the

Indian Banking scenario. It is in the process of raising capital for its growth and

also consolidating its various holdings.

Throughout all this change, the Bank is also attempting to change old mindsets,

attitudes and take all employees together on this exciting road to Transformation.

In a recently concluded mass internal communication programmed termed

‘Parivartan’ the Bank rolled out over 3300 two day workshops across the country

and covered over 130,000 employees in a period of 100 days using about 400

Trainers, to drive home the message of Change and inclusiveness. The workshops

fired the imagination of the employees with some other banks in India as well as

other Public Sector Organizations seeking to emulate the programmed.

The CNN IBN, Network 18 recognized this momentous transformation journey,

the State Bank of India is undertaking, and has awarded the prestigious Indian of

the Year – Business, to its Chairman, Mr. O. P. Bhatt in January 2008.

The elephant has indeed started to dance.

EVOLUTION OF SBI

The origin of the State Bank of India goes back to the first decade of the

nineteenth century with the establishment of the Bank of Calcutta in Calcutta on

2 June 1806. Three years later the bank received its charter and was re-designed

as the Bank of Bengal (2 January 1809). A unique institution, it was the first

joint-stock bank of British India sponsored by the Government of Bengal. The

Bank of Bombay (15 April 1840) and the Bank of Madras (1 July 1843) followed

the Bank of Bengal. These three banks remained at the apex of modern banking

in India till their amalgamation as the Imperial Bank of India on 27 January 1921.

Primarily Anglo-Indian creations, the three presidency banks came into existence

either as a result of the compulsions of imperial finance or by the felt needs of

local European commerce and were not imposed from outside in an arbitrary

manner to modernize India's economy. Their evolution was, however, shaped by

ideas culled from similar developments in Europe and England, and was

influenced by changes occurring in the structure of both the local trading

environment and those in the relations of the Indian economy to the economy of

Europe and the global economic framework.

 

Bank of Bengal H.O.

Establishment of SBI

The establishment of the Bank of Bengal marked the advent of limited liability,

joint-stock banking in India. So was the associated innovation in banking, viz. the

decision to allow the Bank of Bengal to issue notes, which would be accepted for

payment of public revenues within a restricted geographical area. This right of

note issue was very valuable not only for the Bank of Bengal but also its two

siblings, the Banks of Bombay and Madras. It meant an accretion to the capital of

the banks, a capital on which the proprietors did not have to pay any interest. The

concept of deposit banking was also an innovation because the practice of

accepting money for safekeeping (and in some cases, even investment on behalf

of the clients) by the indigenous bankers had not spread as a general habit in most

parts of India. But, for a long time, and especially upto the time that the three

presidency banks had a right of note issue, bank notes and government balances

made up the bulk of the investible resources of the banks.

The three banks were governed by royal charters, which were revised from time

to time. Each charter provided for a share capital, four-fifth of which were

privately subscribed and the rest owned by the provincial government. The

members of the board of directors, which managed the affairs of each bank, were

mostly proprietary directors representing the large European managing agency

houses in India. The rest were government nominees, invariably civil servants,

one of whom was elected as the president of the board.

 

Group Photograph of Central Board (1921)

Business

The business of the banks was initially confined to discounting of bills of

exchange or other negotiable private securities, keeping cash accounts and

receiving deposits and issuing and circulating cash notes. Loans were restricted to

Rs. one lakh and the period of accommodation confined to three months only.

The security for such loans was public securities, commonly called Company's

Paper, bullion, treasure, plate, jewels, or goods 'not of a perishable nature' and no

interest could be charged beyond a rate of twelve per cent. Loans against goods

like opium, indigo, salt woolens, cotton, cotton piece goods, mule twist and silk

goods were also granted but such finance by way of cash credits gained

momentum only from the third decade of the nineteenth century. All

commodities, including tea, sugar and jute, which began to be financed later,

were either pledged or hypothecated to the bank. Demand promissory notes were

signed by the borrower in favour of the guarantor, which was in turn endorsed to

the bank. Lending against shares of the banks or on the mortgage of houses, land

or other real property was, however, forbidden.

Indians were the principal borrowers against deposit of Company's paper, while

the business of discounts on private as well as salary bills was almost the

exclusive monopoly of individuals Europeans and their partnership firms. But the

main function of the three banks, as far as the government was concerned, was to

help the latter raise loans from time to time and also provide a degree of stability

to the prices of government securities.

 

Old Bank of Bengal

Major change in the conditions

A major change in the conditions of operation of the Banks of Bengal, Bombay

and Madras occurred after 1860. With the passing of the Paper Currency Act of

1861, the right of note issue of the presidency banks was abolished and the

Government of India assumed from 1 March 1862 the sole power of issuing

paper currency within British India. The task of management and circulation of

the new currency notes was conferred on the presidency banks and the

Government undertook to transfer the Treasury balances to the banks at places

where the banks would open branches. None of the three banks had till then any

branches (except the sole attempt and that too a short-lived one by the Bank of

Bengal at Mirzapore in 1839) although the charters had given them such

authority. But as soon as the three presidency bands were assured of the free use

of government Treasury balances at places where they would open branches, they

embarked on branch expansion at a rapid pace. By 1876, the branches, agencies

and sub agencies of the three presidency banks covered most of the major parts

and many of the inland trade centers’ in India. While the Bank of Bengal had

eighteen branches including its head office, seasonal branches and sub agencies,

the Banks of Bombay and Madras had fifteen each.

 

Bank of Madras Note Dated 1861 for Rs.10

Presidency Banks Act

The presidency Banks Act, which came into operation on 1 May 1876, brought

the three presidency banks under a common statute with similar restrictions on

business. The proprietary connection of the Government was, however,

terminated, though the banks continued to hold charge of the public debt offices

in the three presidency towns, and the custody of a part of the government

balances. The Act also stipulated the creation of Reserve Treasuries at Calcutta,

Bombay and Madras into which sums above the specified minimum balances

promised to the presidency banks at only their head offices were to be lodged.

The Government could lend to the presidency banks from such Reserve

Treasuries but the latter could look upon them more as a favour than as a right.

 

Bank of Madras

The decision of the Government to keep the surplus balances in Reserve

Treasuries outside the normal control of the presidency banks and the connected

decision not to guarantee minimum government balances at new places where

branches were to be opened effectively checked the growth of new branches after

1876. The pace of expansion witnessed in the previous decade fell sharply

although, in the case of the Bank of Madras, it continued on a modest scale as the

profits of that bank were mainly derived from trade dispersed among a number of

port towns and inland centers of the presidency.

India witnessed rapid commercialization in the last quarter of the nineteenth

century as its railway network expanded to cover all the major regions of the

country. New irrigation networks in Madras, Punjab and Sind accelerated the

process of conversion of subsistence crops into cash crops, a portion of which

found its way into the foreign markets. Tea and coffee plantations transformed

large areas of the eastern Terais, the hills of Assam and the Nilgiris into regions

of estate agriculture par excellence. All these resulted in the expansion of India's

international trade more than six-fold. The three presidency banks were both

beneficiaries and promoters of this commercialization process as they became

involved in the financing of practically every trading, manufacturing and mining

activity in the sub-continent. While the Banks of Bengal and Bombay were

engaged in the financing of large modern manufacturing industries, the Bank of

Madras went into the financing of large modern manufacturing industries; the

Bank of Madras went into the financing of small-scale industries in a way which

had no parallel elsewhere. But the three banks were rigorously excluded from any

business involving foreign exchange. Not only was such business considered

risky for these banks, which held government deposits, it was also feared that

these banks enjoying government patronage would offer unfair competition to the

exchange banks which had by then arrived in India. This exclusion continued till

the creation of the Reserve Bank of India in 1935.

 

Bank of Bombay

Presidency Banks of Bengal

The presidency Banks of Bengal, Bombay and Madras with their 70 branches

were merged in 1921 to form the Imperial Bank of India. The triad had been

transformed into a monolith and a giant among Indian commercial banks had

emerged. The new bank took on the triple role of a commercial bank, a banker's

bank and a banker to the government. But this creation was preceded by years of

deliberations on the need for a 'State Bank of India'. What eventually emerged

was a 'half-way house' combining the functions of a commercial bank and a

quasi-central bank.

The establishment of the Reserve Bank of India as the central bank of the country

in 1935 ended the quasi-central banking role of the Imperial Bank. The latter

ceased to be bankers to the Government of India and instead became agent of the

Reserve Bank for the transaction of government business at centers at which the

central bank was not established. But it continued to maintain currency chests

and small coin depots and operate the remittance facilities scheme for other banks

and the public on terms stipulated by the Reserve Bank. It also acted as a bankers'

bank by holding their surplus cash and granting them advances against authorized

securities. The management of the bank clearing houses also continued with it at

many places where the Reserve Bank did not have offices. The bank was also the

biggest tendered at the Treasury bill auctions conducted by the Reserve Bank on

behalf of the Government.

The establishment of the Reserve Bank simultaneously saw important

amendments being made to the constitution of the Imperial Bank converting it

into a purely commercial bank. The earlier restrictions on its business were

removed and the bank was permitted to undertake foreign exchange business and

executor and trustee business for the first time.

Imperial Bank

The Imperial Bank during the three and a half decades of its existence recorded

an impressive growth in terms of offices, reserves, deposits, investments and

advances, the increases in some cases amounting to more than six-fold. The

financial status and security inherited from its forerunners no doubt provided a

firm and durable platform. But the lofty traditions of banking which the Imperial

Bank consistently maintained and the high standard of integrity it observed in its

operations inspired confidence in its depositors that no other bank in India could

perhaps then equal. All these enabled the Imperial Bank to acquire a pre-eminent

position in the Indian banking industry and also secure a vital place in the

country's economic life.

 

Stamp of Imperial Bank of India

When India attained freedom, the Imperial Bank had a capital base (including

reserves) of Rs.11.85 crores, deposits and advances of Rs.275.14 crores and

Rs.72.94 crores respectively and a network of 172 branches and more than 200

sub offices extending all over the country.

First Five Year Plan

In 1951, when the First Five Year Plan was launched, the development of rural

India was given the highest priority. The commercial banks of the country

including the Imperial Bank of India had till then confined their operations to the

urban sector and were not equipped to respond to the emergent needs of

economic regeneration of the rural areas. In order, therefore, to serve the

economy in general and the rural sector in particular, the All India Rural Credit

Survey Committee recommended the creation of a state-partnered and state-

sponsored bank by taking over the Imperial Bank of India, and integrating with it,

the former state-owned or state-associate banks. An act was accordingly passed

in Parliament in May 1955 and the State Bank of India was constituted on 1 July

1955. More than a quarter of the resources of the Indian banking system thus

passed under the direct control of the State. Later, the State Bank of India

(Subsidiary Banks) Act was passed in 1959, enabling the State Bank of India to

take over eight former State-associated banks as its subsidiaries (later named

Associates).

The State Bank of India was thus born with a new sense of social purpose aided

by the 480 offices comprising branches, sub offices and three Local Head Offices

inherited from the Imperial Bank. The concept of banking as mere repositories of

the community's savings and lenders to creditworthy parties was soon to give

way to the concept of purposeful banking sub serving the growing and diversified

financial needs of planned economic development. The State Bank of India was

destined to act as the pacesetter in this respect and lead the Indian banking system

into the exciting field of national development.

INTRODUCTION TO SBI SBI MUTUAL FUNDS:-

A SBI SBI Mutual Fund is a trust that pools the savings of a number of investors

who share a common financial goal. The money thus collected is then invested in

capital market instruments such as shares, debentures and other securities. The

income earned through these investments and the capital appreciations realized

are shared by its unit holders in proportion to the number of units owned by them.

Thus a SBI SBI 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.

The flow chart below describes broadly the working of a SBI SBI Mutual Fund.

A SBI SBI Mutual Fund is a body corporate registered with the Securities and

Exchange Board of India (SEBI) that pools up the money from

individual/corporate investors and invests the same on behalf of the investors/unit

holders, in Equity shares, Government securities, Bonds, Call Money Markets

etc, and distributes the profits. In the other words, a SBI SBI Mutual Fund allows

investors to indirectly take a position in a basket of assets.

SBI SBI Mutual Fund is a mechanism for pooling the resources by issuing units

to the investors and investing funds in securities in accordance with objectives as

disclosed in offer document. Investments in securities are spread among a wide

cross-section of industries and sectors thus the risk is reduced. Diversification

reduces the risk because all stocks may not move in the same direction in the

same proportion at same time. Investors of SBI SBI Mutual Funds are known as

unit holders.

The investors in proportion to their investments share the profits or losses. The

SBI SBI Mutual Funds normally come out with a number of schemes with

different investment objectives which are launched from time to time. A SBI SBI

Mutual Fund is required to be registered with Securities Exchange Board of India

(SEBI) which regulates securities markets before it can collect funds from the

public.

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI

was bifurcated into two separate entities. One is the Specified Undertaking of the

Unit Trust of India with assets under management of Rs.29,835 crores as at the

end of January 2003, representing broadly, the assets of US 64 scheme, assured

return and certain other schemes. The Specified Undertaking of Unit Trust of

India, functioning under an administrator and under the rules framed by

Government of India and does not come under the purview of the SBI SBI Mutual

Fund Regulations.

ORGANIZATION OF A SBI SBI MUTUAL FUND:

There are many entities involved and the diagram below illustrates the

organizational set up of a SBI SBI Mutual Fund:

(For detailed definitions in the above chart refer to annexure 1)

SBI SBI Mutual Funds diversify their risk by holding a portfolio of instead of

only one asset. This is because by holding all your money in just one asset, the

entire fortunes of your portfolio depend on this one asset. By creating a portfolio

of a variety of assets, this risk is substantially reduced.

SBI SBI Mutual Fund investments are not totally risk free. In fact, investing in

SBI SBI Mutual Funds contains the same risk as investing in the markets, the

only difference being that due to professional management of funds the

controllable risks are substantially reduced. A very important risk involved in SBI

SBI Mutual Fund investments is the market risk. However, the company specific

risks are largely eliminated due to professional fund management.

IMPORTANT CHARACTERISTICS OF A SBI SBI MUTUAL

FUND

A SBI SBI Mutual Fund actually belongs to the investors who have pooled

their

Funds. The ownership of the SBI SBI Mutual Fund is in the hands of the

Investors.

A SBI SBI Mutual Fund is managed by investment professional and other

Service providers, who earns a fee for their services, from the funds.

The pool of Funds is invested in a portfolio of marketable investments.

The value of the portfolio is updated every day.

The investor’s share in the fund is denominated by “units”. The value

of the units changes with change in the portfolio value, every day. The

value of one unit of investment is called net asset value (NAV).

The investment portfolio of the SBI SBI Mutual Fund is created according

to The stated

Investment objectives of the Fund.

ADVANTAGES OF SBI SBI MUTUAL FUNDS:

Diversification: An investor undertakes risk if he invests all his funds in a

single scrip. SBI SBI Mutual Funds invest in a number of companies across

various industries and sectors. This diversification reduces the risk of the

investment.

Professional Management: An investor lacks the knowledge of the capital

market operations and does not have large resources to reap the benefits of

investment. Hence, he requires the help of an expert. SBI SBI Mutual Funds

are managed by professional managers who have the requisite skills and

experiences to analyse the performance and prospectus of companies.

Regulatory oversight: SBI SBI Mutual Funds are subject to many

government regulations that protect investors from fraud.

Liquidity: It's easy to get your money out of a SBI SBI Mutual Fund. Write

a check, make a call, and you've got the cash.

Convenience: You can usually buy SBI SBI Mutual Fund shares by mail,

phone, or over the Internet. It reduces paperwork, saves time and makes

investment easy.

Low cost: SBI SBI Mutual Fund expenses are often no more than 1.5

percent of your investment. Expenses for Index Funds are less than that,

because index funds are not actively managed. Instead, they automatically

buy stock in companies that are listed on a specific index

Transparency: SBI SBI Mutual Funds transparently declare their portfolio

every month. Thus, an investor knows where his/her money is being

deployed and in case they are not happy with the portfolio they can

withdraw at a short notice.

Flexibility: SBI SBI Mutual Funds offer a family of schemes, and investors

have the option of transferring their holdings from one scheme to other.

Tax benefits: SBI SBI Mutual Fund investors now enjoy income tax

benefits. Dividends received from SBI SBI Mutual Funds’ debt schemes are

tax exempt to the overall limit of Rs 9000 allowed under section SOL of the

Income Tax Act.

DISADVANTAGES OF SBI SBI MUTUAL FUNDS

Hidden costs: The SBI SBI Mutual Fund industry tactfully buries costs

under layers of jargon. These costs come despite of negative returns.

Examples of such costs include sales charges, annual fees, and other

expenses; and depending on the timing of their investment, investors may

also have to pay taxes on any capital gains distribution they receive — even

if the fund went on to perform poorly after they bought shares.

Lack of control: Investors typically cannot ascertain the exact make-up

of a fund's portfolio at any given time, nor can they directly influence which

securities the fund manager buys and sells or the timing of those trades.

Dilution: Because funds have small holdings in so many different

companies, high returns from a few investments often don't make much

difference on the overall return. Dilution is also the result of a successful

fund getting too big. When money pours into funds that have had strong

success, the manager often has trouble finding a good investment for all the

new money.

Price Uncertainty: With an individual stock, one can obtain real-time (or

close to real-time) pricing information with relative ease by checking

financial websites or through a broker, as can one observe stock price

changes by the hour or minute. By contrast, with a SBI SBI Mutual Fund,

the price at which one purchases or redeems shares will typically depend on

the fund's NAV, which the fund might not calculate until many hours after

the order has been placed. In general, SBI SBI Mutual Funds must calculate

their NAV at least once every business day, typically after the major U.S.

exchanges close.

STRUCTURE OF A SBI SBI MUTUAL FUND

Sponsor

SBI SBI Mutual FundTrustees

ASSET MANAGEMENT COMPANY

Custodian Registrar

INVESTORS PROFILE:

An investor normally prioritizes his investment needs before undertaking an

investment. So different goals will be allocated to different proportions of the

total disposable amount. Investments for specific goals normally find their way

into the debt market as risk reduction is of prime importance, this is the area for

the risk-averse investors and here, SBI SBI Mutual Funds are generally the best

option. One can avail of the benefits of better returns with added benefits of

anytime liquidity by investing in open-ended debt funds at lower risk, this risk of

default by any company that one has chosen to invest in, can be minimized by

investing in SBI SBI Mutual Funds as the fund managers analyze the companies

financials more minutely than an individual can do as they have the expertise to

do so.

Moving up the risk spectrum, there are people who would like to take some risk

and invest in equity funds/capital market. However, since their appetite for risk is

also limited, they would rather have some exposure to debt as well. For these

investors, balanced funds provide an easy route of investment, armed with

expertise of investment techniques, they can invest in equity as well as good

quality debt thereby reducing risks and providing the investor with better returns

than he could otherwise manage. Since they can reshuffle their portfolio as per

market conditions, they are likely to generate moderate returns even in

pessimistic market conditions.

Next comes the risk takers, risk takers by their nature, would not be averse to

investing in high-risk avenues. Capital markets find their fancy more often than

not, because they have historically generated better returns than any other avenue,

provided, the money was judiciously invested. Though the risk associated is

generally on the higher side of the spectrum, the return-potential compensates for

the risk attached.

MUTUAL EXPECTATIONS AND BENEFITS

Everyone expects the New year to usher an era of joy and prosperity and certainly

looks forward to a windfall in terms of good things to come. Investor is no

exception to this. But before one rushes to celebrate with new investments, it

would be appropriate to take a look at how Y2K treated SBI SBI Mutual Funds

(MFs) - the investment vehicle of the small investor.

A happy-go-lucky-man turned investor would have nothing to write home about,

had he invested in the Year 2000 and stayed invested throughout the year. Positive

returns seemed like a state of utopia in Y2K. What a transformation in an Industry

that had witnessed almost triple digit returns in 1999 when BSE Sensex had

generated returns of about 65 percent.

What was common to MFs in Y2K was the presence of technology, media &

telecom sector scrip’s in portfolios of most funds, especially equity growth funds.

Birla Advantage Fund with and exposure of 67%, Alliance to the tune of 71% are

just to name a few. While the bull phases did not raise any questions about the

portfolio compositions, the bear phases certainly did. NAVs of most of these funds

plummeted raising questions on the extent of portfolio diversification.

When the bull phase came to an end and when most of the funds stood stripped

with the downslide of most of the TMT stocks, most fund managers moved to

quality portfolio levels and reduced their IT exposure to reasonable levels. Most

equity diversified funds, today, maintain IT exposure at 20% to 37% while

simultaneously picking up both old and new economy stocks. But fund managers

still are willing to bet on TMT stocks despite the tumultuous experience they have

had in Y2K. While accepting the possibility of a downward revision of their

growth rate, they foresee no indications of a significant slowdown from at least

India based companies. They concur that the fundamentals of IT sector are strong

with future growth, however, being at a modest pace. They are now of the view

that a mixture of old and new economy scrips would form an ideal portfolio.

While the crash in IT share prices has resulted in a re-balancing of portfolios,

action on the old economy front would further narrow the gap between the so

called ‘click and mortar’ and ‘ brick and mortar’ companies-bring with it a greater

diversification in MF portfolios.

MF Industry in India, like any other Industry, has had its nascent stage and is still

trying to grapple with several inconsistencies. The Industry is now approaching a

stage where a cross section of investing community has begun to comprehend that

MFs provide and ideal investment vehicle to meet their varied investment

objectives in the long run with adequate emphasis on portfolio diversification. All

in all, MFs have had their share of lessons in Y2K and are waiting for newer

horizons in Y2K+1 with abated breath.

TYPES OF SBI SBI MUTUAL FUNDS:

1. OPEN-ENDED SBI SBI MUTUAL FUNDS:-

The holders of the shares in the Fund can resell them to the issuing SBI SBI

Mutual Fund Company at the time. They receive in turn the net assets value

(NAV) of the shares at the time of re-sale. Such SBI SBI Mutual Fund

Companies place their funds in the secondary securities market. They do not

participate in new issue market as do pension funds or life insurance companies.

Thus they influence market price of corporate securities. Open-end investment

companies can sell an unlimited number of Shares and thus keep going larger.

The open-end SBI SBI Mutual Fund Company Buys or sells their shares. These

companies sell new shares NAV plus a Loading or management fees and redeem

shares at NAV. In other words, the target amount and the period both are

indefinite in such funds

2. CLOSED-ENDED SBI MUTUAL FUNDS:-

A closed–end Fund is open for sale to investors for a specific period, after which

further sales are closed. Any further transaction for buying the units or

repurchasing them, Happen in the secondary markets, where closed end Funds are

listed. Therefore new investors buy from the existing investors, and existing

investors can liquidate their units by selling them to other willing buyers. In a

closed end Funds, thus the pool of Funds can technically be kept constant. The

asset management company (AMC) however, can buy out the units from the

investors, in the secondary markets, thus reducing the amount of funds held by

outside investors. The price at which units can be sold or redeemed Depends on

the market prices, which are fundamentally linked to the NAV. Investors in

closed end Funds receive either certificates or Depository receipts, for their

holdings in a closed end SBI SBI Mutual Fund.

ORGANISATION AND MANAGEMENT OF SBI MUTUAL FUNDS:-

In India SBI SBI Mutual Fund usually formed as trusts, three parties are

generally involved viz.

Settler of the trust or the sponsoring organization.

The trust formed under the Indian trust act, 1982 or the trust company

registered under the Indian companies act, 1956

Fund managers or The merchant-banking unit

Custodians.

SBI MUTUAL FUNDS TRUST:-

SBI Mutual Fund trust is created by the sponsors under the Indian trust act,

1982

Which is the main body in the creation of SBI SBI Mutual Fund Trust?

The main functions of SBI SBI Mutual Fund trust are as follows:

Planning and formulating SBI SBI Mutual Funds schemes.

Seeking SEBI’s approval and authorization to these schemes.

Marketing the schemes for public subscription.

Seeking RBI approval in case NRI’s subscription to SBI SBI Mutual Fund

is Invited

Attending to trusteeship function. This function as per guidelines can be

assigned to separately established trust companies too. Trustees are

required to submit a consolidated report six monthly to SEBI to ensure that

the guidelines are fully being complied with trusted are also required to

submit an annual report to the investors in the fund.

FUND MANAGERS (OR) THE ASSES MANAGEMENT COMPANY

(AMC)

AMC has to discharge mainly three functions as under:

I. Taking investment decisions and making investments of the funds through

market dealer/brokers in the secondary market securities or directly in the

primary capital market or money market instruments

II. Realize fund position by taking account of all receivables and realizations,

moving corporate actions involving declaration of dividends,etc to

compensate investors for their investments in units; and

III. Maintaining proper accounting and information for pricing the units and

arriving at net asset value (NAV), the information about the listed schemes

and the transactions of units in the secondary market. AMC has to feed

back the trustees about its fund management operations and has to maintain

a perfect information system.

CUSTODIANS OF SBI MUTUAL FUNDS:-

SBI Mutual Funds run by the subsidiaries of the nationalized banks had their

respective sponsor banks as custodians like canara bank, SBI, PNB, etc.

Foreign banks with higher degree of automation in handling the securities

have assumed the role of custodians for SBI SBI Mutual Funds. With the

establishment of stock Holding Corporation of India the work of custodian

for SBI SBI Mutual Funds is now being handled by it for various SBI SBI

Mutual Funds. Besides, industrial investment trust company acts as sub-

custodian for stock Holding Corporation of India for domestic schemes of

UTI, BOI MF, LIC MF, etc

Fee structure:-

Custodian charges range between 0.15% to 0.20% on the net value of the

customer’s holding for custodian services space is one important factor

which has fixed cost element.

RESPONSIBILITY OF CUSTODIANS:-

Receipt and delivery of securities

Holding of securities.

Collecting income

Holding and processing cost

Corporate actions etc

FUNCTIONS OF CUSTOMERS

Safe custody

Trade settlement

Corporate action

Transfer agents

RATE OF RETURN ON SBI SBI MUTUAL FUNDS:-

An investor in SBI SBI Mutual Fund earns return from two sources:

Income from dividend paid by the SBI SBI Mutual Fund.

Capital gains arising out of selling the units at a price higher than the

acquisition price

Formation and regulations:

1. SBI Mutual Funds are to be established in the form of trusts under the

Indian trusts act and are to be operated by separate asset management

companies (AMC s)

2. AMC’s shall have a minimum Net worth of Rs. 5 crores;

3. AMC’s and Trustees of SBI SBI Mutual Funds are to be two separate legal

entities and that an AMC or its affiliate cannot act as a manager in any

other fund;

4. SBI Mutual Funds dealing exclusively with money market instruments are

to be regulated by the Reserve Bank Of India

5. SBI Mutual Fund dealing primarily in the capital market and also partly

money market instruments are to be regulated by the Securities Exchange

Board Of India (SEBI)

6. All schemes floated by SBI Mutual Funds are to be registered with SEBI

Schemes:-

1. SBI SBI Mutual Funds are allowed to start and operate both closed-end

and open-end schemes;

2. Each closed-end schemes must have a Minimum corpus (pooling up) of

Rs 20 crore;

3. Each open-end scheme must have a Minimum corpus of Rs 50 crore

4. In the case of a Closed –End scheme if the Minimum amount of Rs 20

crore or 60% of the target amount, which ever is higher is not raised then

the entire subscription has to be refunded to the investors;

5. In the case of an Open-Ended schemes, if the Minimum amount of Rs 50

crore or 60 percent of the targeted amount, which ever is higher, is no

raised then the entire subscription has to be refunded to the investors.

Investment norms:-

1. No SBI Mutual Fund, under all its schemes can own more than five percent

of any company’s paid up capital carrying voting rights;

2. No SBI Mutual Fund, under all its schemes taken together can invest more

than 10 percent of its funds in shares or debentures or other instruments of

any single company;

3. No SBI Mutual Fund, under all its schemes taken together can invest more

than 15 percent of its fund in the shares and debentures of any specific

industry, except those schemes which are specifically floated for

investment in one or more specified industries in respect to which a

declaration has been made in the offer letter.

4. No individual scheme of SBI Mutual Funds can invest more than five

percent of its corpus in any one company’s share;

5. SBI Mutual Funds can invest only in transferable securities either in the

money or in the capital market. Privately placed debentures, securitized

debt, and other unquoted debt, and other unquoted debt instruments holding

cannot exceed 10 percent in the case of growth funds and 40 percent in the

case of income funds.

Distribution:

SBI Mutual Funds are required to distribute at least 90 percent of their profits

annually in any given year. Besides these, there are guidelines governing the

operations of SBI Mutual Funds in dealing with shares and also seeking to ensure

greater investor protection through detailed disclosure and reporting by the SBI

Mutual Funds. SEBI has also been granted with powers to over see the

constitution as well as the operations of SBI Mutual Funds, including a common

advertising code. Besides, SEBI can impose penalties on SBI Mutual Funds after

due investigation for their failure to comply with the guidelines.

SBI MUTUAL FUND SCHEME TYPES:

Equity Diversified Schemes

These schemes mainly invest in equity. They seek to achieve long-term capital

appreciation by responding to the dynamically changing Indian economy by

moving across sectors such as Lifestyle, Pharma, Cyclical, Technology, etc.

Sector Schemes

These schemes focus on particular sector as IT, Banking, etc. They seek to

generate long-term capital appreciation by investing in equity and related

securities of companies in that particular sector.

Index Schemes

These schemes aim to provide returns that closely correspond to the return of a

particular stock market index such as BSE Sensex, NSE Nifty, etc. Such schemes

invest in all the stocks comprising the index in approximately the same weightage

as they are given in that index.

Exchange Traded Funds (ETFs)

ETFs invest in stocks underlying a particular stock index like NSE Nifty or BSE

Sensex. They are similar to an index fund with one crucial difference. ETFs are

listed and traded on a stock exchange. In contrast, an index fund is bought and

sold by the fund and its distributors.

Equity Tax Saving Schemes

These work on similar lines as diversified equity funds and seek to achieve long-

term capital appreciation by investing in the entire universe of stocks. The only

difference between these funds and equity-diversified funds is that they demand a

lock-in of 3 years to gain tax benefits.

Dynamic Funds

These schemes alter their exposure to different asset classes based on the market

scenario. Such funds typically try to book profits when the markets are

overvalued and remain fully invested in equities when the markets are

undervalued. This is suitable for investors who find it difficult to decide when to

quit from equity.

Balanced Schemes

These schemes seek to achieve long-term capital appreciation with stability of

investment and current income from a balanced portfolio of high quality equity

and fixed-income securities.

Medium-Term Debt Schemes

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

average maturity of the underlying portfolio is in the range of five to seven years.

Short-Term Debt Schemes

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

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

Money Market Debt Schemes

These schemes invest in debt securities of a short-term nature, which generally

means securities of less than one-year maturity. The typical short-term interest-

bearing instruments these funds invest in Treasury Bills, Certificates of Deposit,

Commercial Paper and Inter-Bank Call Money Market.

Medium-Term Gilt Schemes

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

securities in the scheme is over three years.

Short-Term Gilt Schemes

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

short to medium term maturities.

Floating Rate Funds

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

linked to some benchmark rate like MIBOR. Floating rate funds have a high

relevance when interest rates are on the rise helping investors to ride the interest

rate rise.

Monthly Income Plans (MIPS)

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

of 10-25% in equity to boost the scheme’s returns. MIP schemes are ideal for

investors who seek slightly higher return that pure long-term debt schemes at

marginally higher risk.

DIFFERENT MODES OF RECEIVING THE INCOME EARNED FROM

SBI MUTUAL FUND INVESTMENTS

SBI SBI Mutual Funds offer three methods of receiving income:

Growth Plan

In this plan, dividend is neither declared nor paid out to the investor but is built

into the value of the NAV. In other words, the NAV increases over time due to

such incomes and the investor realizes only the capital appreciation on

redemption of his investment.

Income Plan

In this plan, dividends are paid-out to the investor. In other words, the NAV only

reflects the capital appreciation or depreciation in market price of the underlying

portfolio.

Dividend Re-investment Plan

In this case, dividend is declared but not paid out to the investor, instead, it is

reinvested back into the scheme at the then prevailing NAV. In other words, the

investor is given additional units and not cash as dividend.

SBI MUTUAL FUND INVESTING STRATEGIES:

1. Systematic Investment Plans (SIPs)

These are best suited for young people who have started their careers and need to

build their wealth. SIPs entail an investor to invest a fixed sum of money at

regular intervals in the SBI SBI Mutual Fund scheme the investor has chosen, an

investor opting for SIP in xyz SBI SBI Mutual Fund scheme will need to invest a

certain sum on money every month/quarter/half-year in the scheme.

2. Systematic Withdrawal Plans (SWPs)

These plans are best suited for people nearing retirement. In these plans, an

investor invests in a SBI SBI Mutual Fund scheme and is allowed to withdraw a

fixed sum of money at regular intervals to take care of his expenses

3. Systematic Transfer Plans (STPs)

They allow the investor to transfer on a periodic basis a specified amount from

one scheme to another within the same fund family – meaning two schemes

belonging to the same SBI SBI Mutual Fund. A transfer will be treated as

redemption of units from the scheme from which the transfer is made. Such

redemption or investment will be at the applicable NAV. This service allows the

investor to manage his investments actively to achieve his objectives. Many funds

do not even charge any transaction fees for his service – an added advantage for

the active investor.

ADVANTAGES OF INVESTING TRHOURGH SBI MUTUAL FUNDS :

There are several reasons that can be attributed to the growing popularity and

suitability of SBI SBI Mutual Funds as an investment vehicle especially for retail

investors:

ASSET ALLOCATION

SBI SBI Mutual Funds offer the investors a valuable tool – Asset

Allocation. This is explained by an example.

An investor investing Rs.1 lakh in a SBI SBI Mutual Fund scheme, which has

collected Rs.100 crores and invested the money in various investment options,

will have Rs.1 lakh spread over a number of investment options as demonstrated

below:

Investment Type Percentage of

Allocation (% of

total portfolio)

Total portfolio

of the SBI SBI

Mutual Fund

scheme (Rs. In

crores)

Investors portfolio

allocation (Rs.)

EQUITY: 57% 57 57,000

State Bank of

India

15% 15 15,000

Infosys

Technologies

12% 12 12,000

ABB 10% 10 10,000

Reliance

Industries

9% 9 9,000

MICO 7% 7 7,000

Tata Power 4% 4 4,000

DEBT: 43% 43 43,000

Govt. Securities 20% 20 20,000

Company

Debentures

10% 10 10,000

Institution Bonds 9% 9 9,000

Money Market 4% 4 4,000

Total 100% 100 1,00,000

Thus ‘Asset Allocation’ is allocating your investments in to different investment

options depending on your risk profile and return expectations.

DIVERSIFICATION

Diversification is spreading your investment amount over a larger number of

investments in order to reduce risk. For instance, if you have Rs.10,000 to

invest in Information Technology (IT) stocks, this amount will only buy you a

handful of stocks of perhaps one or two companies. A fall in the market price

of any of these company stocks will significantly erode your investment

amount instead it makes sense to invest in an IT sector SBI SBI Mutual Fund

scheme so that your Rs.10,000 is spread across a larger number of stocks

thereby reducing your risk.

PROFESSIONALS AT WORK

Few investors have the time or expertise to manage their personal investments

every day, to efficiently reinvest interest or dividend income, or to investigate

the thousands of securities available in the financial markets. Fund managers

are professionals and experienced in tracking the finance markets, having

access to extensive research and market information, which enables them to

decide which securities to buy and sell for the fund. For an individual investor

like you, this professionalism is built in when you invest in the SBI SBI

Mutual Fund.

REDUCTION OF TRANSACTION COSTS

While investing directly in securities, all the costs of investing such as

brokerage, custodial services etc. Borne by you are at the highest rates due to

small transaction sizes. However, when going through a fund, you have the

benefit of economies of scale; the fund pays lesser costs because of larger

volumes, a benefit passed on to its investors like you.

EASY ACCESS TO YOUR MONEY

This is one of the most important benefits of a SBI SBI Mutual Fund. Often

you hold shares or bonds that you cannot directly, easily and quickly sell. In

such situations, it could take several days or even longer before you are able to

liquidate his SBI SBI Mutual Fund investment by selling the units to the fund

itself and receive his money within 3 working days.

TRANSPARENCY

The investor gets regular information on the value of his investment in

addition to disclosure on the specific investments made by the fund, the

proportion invested in each class of assets and the fund manager’s investment

strategy and outlook.

SAVING TAXES

Tax saving schemes of SBI SBI Mutual Funds offer investor a tax rebate

under section 88 of the Income Tax Act. Under this section, an investor can

invest up to Rs.10,000 per Financial year in a tax saving scheme. The rate of

rebate under this section depends on the investor’s total income.

INVESTING IN STOCK MARKET INDEX

Index schemes of SBI SBI Mutual Funds give you the opportunity of investing

in scrips that make up a particular index in the same proportion of weightage

that these scrips have in the index. Thus, the return on your investment mirrors

the movement of the index.

INVESTING IN GOVERNMENT SECURITIES

Gilt and Money Market Schemes of SBI SBI Mutual Funds also give you the

opportunity to invest in Government Securities and Money Markets (including

the inter banking call money market)

WELL-REGULATED INDUSTRY

All SBI SBI Mutual Funds are registered with SEBI and they function within

the provisions of strict regulations designed to protect the interests of

investors. The operations of SBI SBI Mutual Funds are regularly monitored by

SEBI.

CONVENIENCE AND FLEXIBILITY

SBI SBI Mutual Funds offer their investors a number of facilities such as inter-

fund transfers, online checking of holding status etc, which direct investments

don’t offer.

RISKS ASSOCIATED WITH SBI SBI MUTUAL FUNDS:-

Investing in SBI SBI Mutual Funds, as with any security, does not come without

risk. One of the most basic economic principles is that risk and reward are

directly correlated. In other words, the greater the potential risk the greater the

potential return. The types of risk commonly associated with SBI SBI Mutual

Funds are:

1) MARKET RISK

Market risk relates to the market value of a security in the future. Market prices

fluctuate and are susceptible to economic and financial trends, supply and

demand, and many other factors that cannot be precisely predicted or controlled.

2) POLITICAL RISK

Changes in the tax laws, trade regulations, administered prices, etc are some of

the many political factors that create market risk. Although collectively, as

citizens, we have indirect control through the power of our vote individually, as

investors, we have virtually no control.

3) INFLATION RISK

Interest rate risk relates to future changes in interest rates. For instance, if an

investor invests in a long-term debt SBI SBI Mutual Fund scheme and interest

rates increase, the NAV of the scheme will fall because the scheme will be end up

holding debt offering lower interest rates.

4) BUSINESS RISK

Business risk is the uncertainty concerning the future existence, stability, and

profitability of the issuer of the security. Business risk is inherent in all business

ventures. The future financial stability of a company cannot be predicted or

guaranteed, nor can the price of its securities. Adverse changes in business

circumstances will reduce the market price of the company’s equity resulting in

proportionate fall in the NAV of the SBI SBI Mutual Fund scheme, which has

invested in the equity of such a company.

5) ECONOMIC RISK

Economic risk involves uncertainty in the economy, which, in turn, can have an

adverse effect on a company’s business. For instance, if monsoons fail in a year,

equity stocks of agriculture-based companies will fall and NAVs of SBI SBI

Mutual Funds, which have invested in such stocks, will fall proportionately.

PERFORMANCE MEASURES OF SBI MUTUAL FUNDS:

SBI SBI Mutual Fund industry today, with about 30 players and more than six

hundred schemes, is one of the most preferred investment avenues in India.

However, with a plethora of schemes to choose from, the retail investor faces

problems in selecting funds. Factors such as investment strategy and management

style are qualitative, but the funds record is an important indicator too.

Though past performance alone cannot be indicative of future performance, it is,

frankly, the only quantitative way to judge how good a fund is at present.

Therefore, there is a need to correctly assess the past performance of different

SBI SBI Mutual Funds. Worldwide, good SBI SBI Mutual Fund companies over

are known by their AMC’s and this fame is directly linked to their superior stock

selection skills.

For SBI Mutual Funds to grow, AMC’s must be held accountable for their

selection of stocks. In other words, there must be some performance indicator that

will reveal the quality of stock selection of various AMC’s.

Return alone should not be considered as the basis of measurement of the

performance of a SBI Mutual Fund scheme, it should also include the risk taken

by the fund manager because different funds will have different levels of risk

attached to them. Risk associated with a fund, in a general, can be defined as

Variability or fluctuations in the returns generated by it. The higher the

fluctuations in the returns of a fund during a given period, higher will be the risk

associated with it. These fluctuations in the returns generated by a fund are

resultant of two guiding forces. First, general market fluctuations, which affect all

the securities, present in the market, called Market risk or Systematic risk and

second, fluctuations due to specific securities present in the portfolio of the fund,

called Unsystematic risk. The Total Risk of a given fund is sum of these two and

is measured in terms of standard deviation of returns of the fund.

Systematic risk, on the other hand, is measured in terms of Beta, which

represents fluctuations in the NAV of the fund vis-à-vis market. The more

responsive the NAV of a SBI Mutual Fund is to the changes in the market; higher

will be its beta. Beta is calculated by relating the returns on a SBI Mutual Fund

with the returns in the market. While Unsystematic risk can be diversified

through investments in a number of instruments, systematic risk cannot. By using

the risk return relationship, we try to assess the competitive strength of the SBI

Mutual Funds one another in a better way. In order to determine the risk-adjusted

returns of investment portfolios, several eminent authors have worked since

1960s to develop composite performance indices to evaluate a portfolio by

comparing alternative portfolios within a particular risk class.

The most important and widely used measures of performance are:

The Treynor’Measure

The Sharpe Measure

Jenson Model

Fama Model

1) The Treynor Measure:-

Developed by Jack Treynor, this performance measure evaluates funds on the

basis of Treynor's Index.

This Index is a ratio of return generated by the fund over and above risk free rate

of return (generally taken to be the return on securities backed by the

government, as there is no credit risk associated), during a given period and

systematic risk associated with it (beta). Symbolically, it can be represented as:

Treynor's Index (Ti) = (Ri - Rf)/Bi.

Where,

Ri represents return on fund,

Rf is risk free rate of return, and

Bi is beta of the fund.

All risk-averse investors would like to maximize this value. While a high and

positive Treynor's Index shows a superior risk-adjusted performance of a fund, a

low and negative Treynor's Index is an indication of unfavorable performance.

2) The Sharpe Measure :-

In this model, performance of a fund is evaluated on the basis of Sharpe Ratio,

which is a ratio of returns generated by the fund over and above risk free rate of

return and the total risk associated with it.

According to Sharpe, it is the total risk of the fund that the investors are

concerned about. So, the model evaluates funds on the basis of reward per unit of

total risk. Symbolically, it can be written as:

Sharpe Index (Si) = (Ri - Rf)/Si

Where,

Si is standard deviation of the fund,

Ri represents return on fund, and

Rf is risk free rate of return.

While a high and positive Sharpe Ratio shows a superior risk-adjusted

performance of a fund, a low and negative Sharpe Ratio is an indication of

unfavorable performance.

Comparison of Sharpe and Treynor

Sharpe and Treynor measures are similar in a way, since they both divide the risk

premium by a numerical risk measure. The total risk is appropriate when we are

evaluating the risk return relationship for well-diversified portfolios. On the other

hand, the systematic risk is the relevant measure of risk when we are evaluating

less than fully diversified portfolios or individual stocks. For a well-diversified

portfolio the total risk is equal to systematic risk. Rankings based on total risk

(Sharpe measure) and systematic risk (Treynor measure) should be identical for a

well-diversified portfolio, as the total risk is reduced to systematic risk.

Therefore, a poorly diversified fund that ranks higher on Treynor measure,

compared with another fund that is highly diversified, will rank lower on Sharpe

Measure.

3) Jenson Model:-

Jenson's model proposes another risk adjusted performance measure. This

measure was developed by Michael Jenson and is sometimes referred to as the

differential Return Method. This measure involves evaluation of the returns that

the fund has generated vs. the returns actually expected out of the fund1 given the

level of its systematic risk. The surplus between the two returns is called Alpha,

which measures the performance of a fund compared with the actual returns over

the period. Required return of a fund at a given level of risk (Bi) can be

calculated as:

Ri = Rf + Bi (Rm - Rf)

Where,

Ri represents return on fund, and

Rm is average market return during the given period,

Rf is risk free rate of return, and

Bi is Beta deviation of the fund.

After calculating it, Alpha can be obtained by subtracting required return

from the actual return of the fund.

Higher alpha represents superior performance of the fund and vice versa.

Limitation of this model is that it considers only systematic risk not the entire risk

associated with the fund and an ordinary investor cannot mitigate unsystematic

risk, as his knowledge of market is primitive.

4) Fama Model:-

The Eugene Fama model is an extension of Jenson model. This model compares

the performance, measured in terms of returns, of a fund with the required return

commensurate with the total risk associated with it. The difference between these

two is taken as a measure of the performance of the fund and is called Net

Selectivity.

The Net Selectivity represents the stock selection skill of the fund manager, as it

is the excess returns over and above the return required to compensate for the

total risk taken by the fund manager. Higher value of which indicates that fund

manager has earned returns well above the return commensurate with the level of

risk taken by him.

Required return can be calculated as: Ri = Rf + Si/Sm*(Rm - Rf)

Where,

Ri represents return on fund,

Sm is standard deviation of market returns,

Rm is average market return during the given period, and

Rf is risk free rate of return.

The Net Selectivity is then calculated by subtracting this required return

from the actual return of the fund.

Among the above performance measures, two models namely, Treynor measure

and Jenson model use Systematic risk is based on the premise that the

Unsystematic risk is diversifiable. These models are suitable for large investors

like institutional investors with high risk taking capacities as they do not face

paucity of funds and can invest in a number of options to dilute some risks. For

them, a portfolio can be spread across a number of stocks and sectors. However,

Sharpe measure and Fama model that consider the entire risk associated with

fund are suitable for small investors, as the ordinary investor lacks the necessary

skill and resources to diversify. Moreover, the selection of the fund on the basis

of superior stock selection ability of the fund manager will also help in

safeguarding the money invested to a great extent. The investment in funds that

have generated big returns at higher levels of risks leaves the money all the more

prone to risks of all kinds that may exceed the individual investors' risk appetite.

HISTORY OF THE INDIAN SBI MUTUAL FUND INDUSTRY

 

The SBI SBI Mutual Fund industry in India started in 1963 with the formation of

Unit Trust of India, at the initiative of the Government of India and Reserve Bank

of India. The history of SBI SBI Mutual Funds in India can be broadly divided into

four distinct phases

First Phase – 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was

set up by the Reserve Bank of India and functioned under the Regulatory and

administrative control of the Reserve Bank of India. In 1978 UTI was de-linked

from the RBI and the Industrial Development Bank of India (IDBI) took over the

regulatory and administrative control in place of RBI. The first scheme launched

by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of

assets under management.

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

1987 marked the entry of non- UTI, public sector SBI SBI Mutual Funds set up by

public sector banks and Life Insurance Corporation of India (LIC) and General

Insurance Corporation of India (GIC). SBI SBI SBI Mutual Fund was the first

non- UTI SBI SBI Mutual Fund established in June 1987 followed by Canbank

SBI SBI Mutual Fund (Dec 87), Punjab National Bank SBI SBI Mutual Fund (Aug

89), Indian Bank SBI SBI Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of

Baroda SBI SBI Mutual Fund (Oct 92). LIC established its SBI SBI Mutual Fund

in June 1989 while GIC had set up its SBI SBI Mutual Fund in December 1990.

At the end of 1993, the SBI SBI Mutual Fund industry had assets under

management of Rs.47,004 crores.

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

With the entry of private sector funds in 1993, a new era started in the Indian SBI

SBI Mutual Fund industry, giving the Indian investors a wider choice of fund

families. Also, 1993 was the year in which the first SBI SBI Mutual Fund

Regulations came into being, under which all SBI SBI Mutual Funds, except UTI

were to be registered and governed. The erstwhile Kothari Pioneer (now merged

with Franklin Templeton) was the first private sector SBI SBI Mutual Fund

registered in July 1993.

The 1993 SEBI (SBI SBI Mutual Fund) Regulations were substituted by a more

comprehensive and revised SBI SBI Mutual Fund Regulations in 1996. The

industry now functions under the SEBI (SBI SBI Mutual Fund) Regulations 1996.

The number of SBI SBI Mutual Fund houses went on increasing, with many

foreign SBI SBI Mutual Funds setting up funds in India and also the industry has

witnessed several mergers and acquisitions. As at the end of January 2003, there

were 33 SBI SBI Mutual Funds with total assets of Rs. 1,21,805 crores. The Unit

Trust of India with Rs.44,541 crores of assets under management was way ahead

of other SBI SBI Mutual Funds.

 

Fourth Phase – since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI

was bifurcated into two separate entities. One is the Specified Undertaking of the

Unit Trust of India with assets under management of Rs.29,835 crores as at the

end of January 2003, representing broadly, the assets of US 64 scheme, assured

return and certain other schemes. The Specified Undertaking of Unit Trust of

India, functioning under an administrator and under the rules framed by

Government of India and does not come under the purview of the SBI SBI Mutual

Fund Regulations.

OBJECTIVE

The present study has been undertaken with the object of examining, analyzing and inferring the

effect of capital market on mutual fund, which addresses the following issues:

To understand the effect of recent changes in stock market on the mutual funds.

To understand basic concepts of mutual funds

To analyze the NAVs of various mutual funds during the last few months.

To analyze the average returns of various mutual funds during the last few months.

The secondary objective of this study is to understand the role of distributors in influencing

investor’s decision.

SCOPE OF THE STUDY:

Subject matter is related to the investor’s approach towards mutual funds and ulips.

People of age between 20 to 60

People of income group between 10000 to 30000.

Area limited to Lucknow.

Demographics include names, age, qualification, occupation, marital status and annual

income.

LIMITATIONS OF STUDY

The edifice of the study entirely stands up on the pillar of information given by respondent

Limitations applicable to the questionnaire method may be applicable to this study, as biased

answers, memory access variation, in cooperative and doubtful approach.

The time for study was very short.

The secondary data available for comparative analysis is only for the period of 2008-2009

Due to various factors associated, the information provided by customer has its own bias.

HYPOTHESIS TESTING

Null hypothesis (H0) = Preference of investment of people in ULIP is more

than Mutual fund

Alternative Hypothesis (H1) = Preference of investment of people in

Mutual fund is more than ULIP

RESEARCH METHODOLOGY

The study of capital market and its effect on mutual funds and ULIP is an arduous task in itself.

The keyword in handling such kind of problems is – research. Gathering information from all

the possible sources, whether by different articles, press releases, company circulars or by direct

interaction with the clients or face to face interviews with the head of the department.

This project work is mainly based on Primary and Secondary data in which primary data was

collected and secondary data was available to us from the confidential office records of the

department, various magazines and newspapers published by concerned authorities. The data

was also collected from secondary sources; mainly from various internet sites related to capital

market and mutual funds and Key Information Memorandum of various fund houses. However

the information gathered was mainly from self analysis and from interaction with the senior

employees of the CMSD department as well as with the highly informed and experienced clients.

The interpretation of data and constructions of graphs was done using Microsoft Word Graph

chart.

RESEARCH DESIGN:

Research was initiated by examining primary and secondary data to gain insight into the

problem. By analyzing primary and secondary data, the study aim is to explore the short comings

of the present system and primary data will help to validate the analysis of secondary data

besides on unrevealing the areas which calls for improvement.

SAMPLING PLAN:

Since it is not possible to study whole universe, it becomes necessary to take sample from the

universe to know about its characteristics.

SAMPLE TECHNIQUE: Convenience Sampling.

SAMPLE SIZE: 20

RESEARCH INSTRUMENT: Structured Questionnaire.

RESEARCH OBJECTIVE

i. To study increasing trend of technology related services in banking industry in India

ii. To identify and analyze the various components of the service rendered by SBI

iii. To analyze the benefit of various deposit schemesoffered by SBI and technology related

services offered by different banks on customers

Project Usefulness in Future

This project will help us to give information about various deposit schemes offered by SBI,their

benefits and also knowledge about various technology related services offered by the bank. It

helps to compare the past & present services provided by banks .

RESEARCH METHODOLOGY

Research Introduction

The activities of market research include defining marketing opportunities and problems,

generating and evaluating marketing ideas, monitoring performance, and understanding the

marketing process. The methodology of the study included selection of sample, study/survey of

library references, collation and compilation of the primary and secondary data and information

obtained through structured questionnaires, open ended interview.

Data Collection

We have collected two types of Data

a. Primary Data – through Questionnaire and interaction.primary research is done for

studying customer preference towards various schemes offered by SBI

b. Secondary Data – through internet, articles, magazines, bank visit,studying project

reports etc. our report contains mainly secondary data

Research Methodology :

Research Design:

The techniques used for research is Exploratory Research.

Research Tool :

Questionnaire and customer interaction( sample size 100)

Through internet, articles, magazines etc.

DATA ANALYSIS

Q1) Education Qualification

Undergraduate 5

Graduate 84

Post graduate 11

29%

50%

21%

Education Qualification

Graduate

Post grad-uate

COMMENT

Half of the respondents are graduates and have their accounts in different banks. Undergraduate

also constitute 29% of the account holders.

Q2) Marital Status

S.No Marital Status No of Respondents

1 Married 67

2 Single 33

67%

33%

Gender

Married Single

COMMENT

67% respondents are married and this shows saving and investment habit increases after

marriage. Single persons are also increasingly saving their earnings in banks.

Q3) Occupation

S.No Occupation No of Respondents

1 Profession 18

2 Service 36

3 Business 26

4 Student 20

18%

36%

26%

20%

occupation

Profession

Service

Business

Student

COMMENT

It shows that service or salaried class constitute 36% of the population and availing the

advantage of a wide product range offered by different banks followed by business class and

proffesionals.

Q4) Your annual household income.

S.No Household income

No of

Respondents

1 Less than 2 lack 35

2 Between 2 to 5 lack 54

3 Between 5 to 8 lack 11

4 More than 8 lack 0

35%

54%

11%

annual household income

<than 2 lackBetween 2 to 5 lackBetween 5 to 8 lackBetween 5 to 8 lack

COMMENT

It shows that between 2-5 lakh income group constitute largest segment of banks with 54% of

respondents followed by customer who belong to less than 2 lakh income group.

Q5) You are a customer of SBI?

S.N

o Existing customer No of Respondents

1 Yes 83

2 No 17

83%

17%

customer of SBI

yesno

COMMENT

From the total respondents 83% were already customers of SBI and availing the facilities of a

wide product range only 17% respondents are not current customers of SBI.

Q6) What is your perception about different products and services offered by SBI?

S.No Customer perception No of Respondents

1 Lucrative 53

2 Not lucrative 29

3 No idea 18

53%

29%

18%

products and services offered by SBI

Lucrative

Not lucrative

No idea

COMMENT

Most people consider SBI’s product range and services lucrative because of its wide reach ability

and creditworthiness. 29% respondents found it not lucrative because of slow technological up

gradation and entry of private banks

Q7) Do you have taken any of these taxes saving scheme provided by SBI?

S.No Tax saving schemes No of Respondents

1 Public provident fund 48

2 Senior citizens savings scheme 24

3 SBI Tax Savings Scheme, 2006 28

48%

24%

28%

taxes saving scheme provided by SBI

Public provident fund

Senior citizens savings scheme

SBI Tax Savings Scheme, 2006

COMMENT

48% respondents among all are benefitted by SBI’s public provident fund, followed by those

customers who have invested in Senior citizens savings scheme, constitiute 24% and SBI Tax

Savings Scheme, 2006 holders constitute 28%

Q8) Do you want to open a Savings account or Current account with SBI? (If not an

existing customer)

S.No Want to open accounts No of Respondents

1 Yes 64

2 No 22

3 Will tell later 16

63%

22%

16%

want to open a Savings account or Current account

Yes

No

Will tell later

COMMENT

A large number of respondents are willing to open an account in SBI in near future because of its

far reach ability and easy accessibility.

Q9) What is your main purpose to deposit money in various investment plans offered by

SBI?

21%

19%12%

32%

16%

main purpose to deposit money in var-ious investment plans

Savings

safety

liquidity

tax exemption

on demand payment

S.N

o Main purpose No of Respondents

1 Savings 21

2 Safety 19

3 Liquidity 12

4 tax exemption 32

5 on demand payment 16

COMMENT

The main purpose of depositing in various bank schemes is to avail tax exemptions on their

deposits, savings for future use and safety are two other main purpose followed by on demand

payment and liquidity.

Q10) Do you have your salary account in SBI?

S.No Having salary accounts No of Respondents

1 Yes 72

2 No 28

72%

28%

salary account in SBI

yes

no

COMMENT

Mostly people who belongs to government and public sector maintains their salary account in

SBI which increases its deposit’s stock.

Q11) Are you availing any of these facilities offered by SBI?

S.No Other facilities No of Respondents

1 ATMs 47

2 credit/debit card 32

3 Demat account 5

4 online banking 2

65%

24% 8%3%

other facilities

ATMs

credit/debit card

Demat account

online banking

COMMENT

SBI has a largest ATM network which offers computerized transactions where customers can

utilize the services whenever and wherever there is a need

Q12)Do you have your accounts in any other bank, if yes then in which bank?

S.NO Current customer of bank No of Respondents

1 PNB 14

2 Bank of Baroda 9

3 Union bank 5

4 HDFC 11

5 Allahabad Bank 14

6 ICICI Bank 22

7 Indian Overseas bank 3

8 Central Bank 0

9 Bank of India 21

10 Others 1

14%

9%

5%11%14%

22%

3%21%

1%

accounts in any other bankPNB

Bank of Baroda

Union bank

HDFC

Allahabad Bank

ICICI Bank

Indian Overseas bank

Central Bank

Bank of India

Others

COMMENT

SBI holds 20% deposit market in INDIA. Private players like ICICI and HDFC had emerged two

leading banks following it, Bank Of India is also a leading public sector bank.

FINDINGS

1) In recent years increase in disposable income and increased number of working women lead

to bulk deposits in SBI.

2) The main purpose of deposits is to enjoy tax exemptions and safety of their deposits.

Salaried class constitutes its largest segment.

3) ICICI, HDFC and Bank of India are the main competitors of SBI and giving it tough

competition.

4) SBI is still largest bank in INDIA due to its wide reach ability in all parts of India with its

wide range of products and services.

5) Most of the customers found its products lucrative because of attractive rates of interest on

their deposits, convenient and economical method of payment and means of transfer of fund

from one place to another

6) Customer prefer SBI bank because of its government backing and its working style

7) Reasons for high use of SBI advance product

biggest bank of India

attractive rate of returns

transparency

simple & fast processing

quick processing

CONCLUSION

From the analysis part it can be conclude that customers have a good respond towards SBI

advance products. SBI is in 1st position having large number of customers & providing good

services to them. The bank has a wide customer base, so the bank should concentrate on this to

retain these customers.

In present scenario SBI is the largest advance product issuer in India. Within a very short period

of time the achievement made by SBI is excellent, what a normal bank cannot expect,but it is

being done by SBI. It happens due to employee dedication towards the organization, fastest

growing Indian economy, & brand image.

To be the largest advance product issuer, SBI should focus on-

Launch Innovative product

Customized advance products

Better customer services

Fastest customers problem solving techniques

Customer retention

Apart from all the above, SBI believe in providing good customer services to their customers

which is a key factor for success in future

SWOT ANALYSIS

Strengths:

Brand Name : SBI Bank has earned a reputation in the market over the period of

time(Being the oldest bank in India tracing history back to 1806)

Market Leader: SBI is ranked at 380 in 2008 Fortune Global 500 list, and ranked 219 in

2008 Forbes Global 2000. With an asset base of $126 billion and its reach, it is a

regional banking behemoth.

Wide Distribution Network : Excellent penetration in the country with more than 10000

core branches and more than 5100 branches of associate banks (subsidiaries).

Diversified Portfolio: SBI Bank has all the products under its belt, which help it to

extend the relationship with existing customer.SBI Bank has umbrella of products to

offer their customers, if once customer has relationship with the bank.

Government Owned : Government owns 60% stake in SBI. This gives SBI an edge over

private banks in terms of customer security.

Low Transition Costs -SBI offers very low transition costs which attracts small

customers.

Weaknesses:

The existing hierarchical management structure of the bank, although strength in some

respects, is a barrier to change.

Though SBI cards are the 2nd largest player in the credit card industry, it has the highest

non performing assets (NPAs) in the industry, which stand out to be at 16.28 % (Dec

2007).

Modernisation: SBI lags with respect to private players in terms of modernisation of its

processes, infrastructure, centralisation, etc.

Opportunities:

Merger of associate banks with SBI: Merger of all the associate banks (like SBH, SBM,

etc) into SBI will create a mega bank which streamlines operations and unlocks value.

Planning to add 2000 branches and 3000 ATMs in 2008-2009. This will further increase

its reach.

Increasing trade and business relations and a large number of expatriate populations

offers a great opportunity to expand on foreign soil.

Threats:

Advent of MNC banks: Large numbers of MNC banks are mushrooming in the Indian

market due to the friendly policies adopted by the government. This can increase the

level of competition and prove a potential threat for the market share of SBI bank.

Consumer expectations have increased many folds in last few years and the bank has not

been responsive enough to meet them on time.

Private banks have started venturing into the rural and semi-urban sector, which used to

be the bastion of the State Bank and other PSU banks

SUGGESTION & RECOMMENDATION

1) Customer awareness programme is required so that more people should attract towards

advance product.

2) Bank should more concern about physical verification rather than phone verification so it

will avoid fraud or cheating.

3) Advance product selling agents must not give any type of wrong informationregarding

advance product.

4)For the better service new offers would be require.

5) SBI customer care should more concern about the fastest settlement of customerproblems.

6) Agents should be trained, well educated & proper trained to convince the people

7) About different advance product

8) It is the duty of the bank to disclose all the material facts regarding advance product, like ROI,

repayment period and any types of charges, etc.

9) Special scheme should be implemented to encourage both customer and agents.

10) SBI should more focus on Retaining existing customers

11) Bank must focus on Segmentation based on customer knowledge Productoffering based on

customer demand.

12) customer should concentrate and should very precautionary while using modern technology

such as ATM, mobile banking facilty, etc

ANNEXURE

www.sbi.com

www.sbideposits.com

www.rbi.org.in

www.e-investing.in Financial Services

www.differencebetween.net/.../difference-between- rtgs -and-neft

en.wikipedia.org/wiki/CFMS - Cached

www. ecs .com.tw

en.wikipedia.org/wiki/Electronic_funds_transfer

en.wikipedia.org/wiki/Mobile_banking