DISSERTATION ON

“RECENT TRENDS IN MUTUAL FUNDS”

SUBMITTED BY:

SUNIL KUMAR YADAV

BBA 2007-2010

Semester-VI

Enrollment no-A7006407046

UNDER GUIDENCE OF:

Dr. Richa Raghuvanshi

ABS, LUCKNOW.

DISSERTATION REPORT IN PARTIAL FULFILLMENT OF THE AWARD OF FULL TIME

BACHELOR OF BUSINESS ADMINISTRATION (2007-10))

AMITY BUSINESS SCHOOL

AMITY UNIVERSITY UTTAR PRADESH LUCKNOW

AMITY UNIVERSITY UTTAR PRADESH

Lucknow Campus

Amity Business School

STUDENT’S CERTIFICATE

Certified that this report is prepared based on the Dissertation project undertaken by me on

the topic “RECENT TRENDS IN MUTUAL FUNDS” under the able guidance of

Lecturer Dr. Richa Raghuvanshi in partial fulfillment of the requirement for award of

degree of Bachelor of Business Administration from Amity University Uttar Pradesh.

Date: ___________________

Signature Signature Signature

Name:- Sunil Kr. Yadav Name: -Dr. Richa Raghuvanshi Name: Prof. R.P Singh

Student Faculty Guide Director ABS.

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FACULTY GUIDE’S CERTIFICATE

Certified that this report is prepared based on the Dissertation project undertaken by Sunil

Kumar Yadav under my guidance in partial fulfillment of the requirement for award of

degree of Bachelor of Business Administration from Amity University Uttar Pradesh.

This project report is authentic and is an outcome of hard labor of the student. As a faculty

guide I wish him all the best for a bright and a successful future.

Date: ___________________

Signature

Name: - Dr. Richa Raghuvanshi

Faculty Guide

3

Abstract

Over the past decades mutual funds have grown intensely in popularity and have

experienced a considerable growth rate. Mutual funds are popular because they make it

easy for small investors to invest their money in a diversified pool of securities. As the

mutual fund industry has evolved over the years, there have arisen many questions

about the nature of operations. This Report on Mutual Funds‘ provides an in-depth

coverage of the mutual fund industry and its operations in an interactive format. It is

intended to familiarize with the basic concepts related to mutual funds. The Report

first provides the fundamentals, explaining what mutual funds are and how they work.

Recent trends in Mutual funds have also been shown. Data Analysis of Indian Large-

Cap Mutual fund market has been done to give a comparative analysis of the top 6

funds in the category. Various factors surrounding the performance of these mutual

funds are then highlighted along with a brief of various applications. Finally, the report

depicts the conclusion.

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ACKNOWLEDGEMENT

In preparing this dissertation report a considerable amount of thinking and informational

inputs from various sources were involved. I express my deep sense of gratitude to

Dr.Richa Raghuvanshi, my faculty guide for her excellent spirit, effective guidance,

encouragement and constant criticism, which gave me the confidence to complete the term

paper effectively. In spite of having a very busy schedule, she made sure in every way that I

acquire the best possible exposure and knowledge during my preparation of research report

under her guidance. Shee gave all the time and attention, which I needed to complete my

research and compile my term paper in as much orderly way as possible.

I am also thankful to all those people, who are directly or indirectly associated

with the timely completion my term paper, without which I otherwise would not have able to

complete my dissertation report.

Sunil Kumar Yadav

BBA , Semester VI

(2007-2010)

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TABLE OF CONTENTS

Abstract

Chapter 1 – Introduction

1.1Objective of the study

1.2Scope of the study

1.3Need of the study

1.4Limitation of the study

Chapter -2 History And Growth Of Mutual Fund

2.1 Definition and evolution

2.2 How an Investor can earn through MFs

2.3 Characteristics of Mutual Fund

2.4 Critical views about MF

2.5 Types of Mutual Funds

2.6 Structure of Mutual Funds

2.7 Other Types of Investment Companies

2.8 Performance Measures Of Mutual Funds

Chapter 3- Company Profile

Chapter 4– Research Methodology

Chapter 5 – Recent Trends in Mutual Funds

Chapter 6 – Conclusion

Chapter7 – Bibliography

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Chapter-1

INTRODUCTION

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Objective of the study

To understand the different aspects of Mutual Fund.

To understand the limitations and benefits of investment in Mutual Fund.

Analysis of Mutual fund portfolios for different type of investor.

Recent trend and development in the field of Mutual fund.

SCOPE OF THE STUDY

A large number of players have entered the market and trying to gain market share in this

rapidly improving market. Hence there is a need for every company to understand the needs

and wants of the investor. Understanding the investor perception of risk is one of the methods

to identify the preferences of the investor.

The study will be helpful to know the investors perception of risk of mutual fund products.

This project report may be helpful for the company to device or alter their sales promotion

strategies for various mutual fund products.

NEED OF THE STUDY

Mutual fund is a retail product designed to target small investors, salaried people and others

who are intimated by the stock market but nevertheless, like to reap the benefits of stock

market investing. Investors are a highly heterogeneous group. Hence there is a need to design

products to their expectation. Hence understanding the risk perception of investors is an

important attribute to determine their expectation.

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LIMITATIONS OF THE STUDY

The project has certain limitations that were unavoidable. The limitations fall beyond the

control of the researcher while collecting and analyzing the data.

Analysis and interpretation of results depends only on the data obtained

from websites and journals.

Only a sample of sources has been taken for the study.

Some of the information on internet may be biased.

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CHAPTER-2

HISTORY

AND GROWTH

OF MUTUAL FUND

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DEFINITION

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 appreciation realized is shared by its unit

holders in proportion to the number of units owned by them. Thus a Mutual Fund is

the most suitable investment for the common man as it offers an opportunity to invest

in a diversified, professionally managed basket of securities at a relatively low cost.

The flow chart below describes broadly the working of a mutual fund.

Mutual funds invest in three broad categories of financial assets:

1. Stock: Equity and equity related instrument.

2. Bond: Debt instruments that have a maturity of more then one year.

3. cash : Debt instrument that have a maturity of less then one year

and bank deposit.

As per the US Securities and Exchange Commission, a mutual fund is a company that pools

money from many investors and invests the money in stocks, bonds, short-term money-

market instruments, other securities or assets, or some combination of these investments. The

combined holdings which the mutual fund owns are known as its portfolio. Each share

represents an investor's proportionate ownership of the fund's holdings and the income those

holdings generate. Mutual funds have a fund manager who invests the money on behalf of the

investors by buying / selling stocks, bonds etc. Currently, the worldwide value of all mutual

funds totals more than $US 26 trillion. The United States leads with the number of mutual

fund schemes. There are more than 8000 mutual fund schemes in the U.S.A.

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(i)-MUTUAL FUNDS

Mutual Fund Operation Flow Chart

(ii) ORGANISATION OF A MUTUAL FUND There are many entities involved and the diagram below

illustrates the oganisational set up of a mutual fund

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ADVANTAGES OF MUTUAL FUNDS

The advantages of investing in a Mutual Fund are:

Professional Management

Diversification

Convenient Administration

Return Potential

Low Costs

Transparency

Choice of schemes

Tax benefits

(iii)

VARIOUS MUTUAL FUND SCHEMES

Equity/Growth Schemes

The aim of growth funds is to provide capital appreciation over the medium to long-

term. Such schemes normally invest a major part of their corpus in equities. Such

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funds have comparatively high risks. These schemes provide different options to the

investors like dividend option, capital appreciation, etc. and the investors may choose

an option depending on their preferences.

Debt/Income Schemes

The aim of income funds is to provide regular and steady income to investors. Such

schemes generally invest in fixed income securities such as bonds, corporate

debentures, Government securities and

Money market instruments. Such funds are less risky compared to equity schemes.

These funds are not affected because of fluctuations in equity markets..

Sector Specific Schemes

These are the funds/schemes which invest in the securities of only those sectors or

industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast

Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds

are dependent on the performance of the respective sectors/industries. While these

funds may give higher returns, they are more risky compared to diversified funds.

Types of Mutual funds

There are more than 10,000 mutual funds in North America, each having different risks and

rewards. Each fund has a predetermined investment objective that tailors the fund's assets,

regions of investments and investment strategies. Most mutual funds fall into one of three

main categories — equity funds (stocks), fixed income funds (bonds), and money market

funds. All mutual funds are variations of these three asset classes. For example, while equity

funds that invest in fast-growing companies are known as growth funds, equity funds that

invest only in companies of the same sector or region are known as specialty funds.

1 Money market mutual funds

It consists of short term debt instruments. These mutual funds carry lower risks than other

mutual funds; in USA such funds can invest only in certain high-quality, short-term

investments issued by the U.S. government, U.S. corporations, and state and local

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governments. Money market funds don‘t offer very high returns as they try to keep their net

asset value (NAV) — which represents the value of one share in a fund — at a stable $1.00

per share. Loss of principle here is highly unlikely; but the NAV may fall below $1.00 if the

fund's investments perform poorly. Investor losses have been rare, but they are possible.

Inflation risk — the risk that inflation will outpace and erode investment returns over time —

can be a potential concern for investors in money market funds.

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2 Bond/fixed income funds

Bond funds invest primarily in securities known as bonds. A bond is a type of security that

resembles a loan. When a bond is purchased, money is lent to the company, municipality, or

government agency that issued the bond. In exchange for the use of this money, the issuer

promises to repay the amount loaned (the principal; also known as the face value of the bond)

on a specific maturity date. In addition, the issuer typically promises to make periodic interest

payments over the life of the loan.

A bond fund share represents ownership in a pool of bonds and other securities comprising

the fund‘s portfolio. Although there have been past exceptions, bond funds tend to be less

volatile than stock funds and often produce regular income. For these reasons, investors often

use bond funds to diversify, provide a stream of income, or invest for intermediate-term

goals. Like stock funds, bond funds have risks and can make or lose money.

Types of Risk

After a bond is first issued, it may be traded. If a bond is traded before it matures, it may be

worth more or less than the price paid for it. The price at which a bond is traded can be

affected by several types of risk.

Credit Risk:It refers to the risk of loss of principal or loss of a financial reward resulting

from a borrower's failure to repay a loan or otherwise meet a contractual obligation. It is

lower for funds investing in insured or Treasury bonds and higher for those investing in junk

bonds.

Interest Rate Risk: The risk that the market value of the bonds will go down when interest

rates go up. Because of this, an investor can lose money in any bond fund, including those

that invest only in insured bonds or Treasury bonds. Funds that invest in longer-term bonds

tend to have higher interest rate risk.

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Prepayment Risk: The chance that a bond will be paid off early. For example, if interest

rates fall, a bond issuer may decide to pay off (or "retire") its debt and issue new bonds that

pay a lower rate. When this happens, the fund may not be able to reinvest the proceeds in an

investment with as high a return or yield.

3 Stock funds

It represents the largest category of mutual funds; its objective is long term capital growth

since historically, stocks have done better than other types of investments over the long term.

Overall "market risk" poses the greatest potential danger for investors in stocks funds. Stock

prices can fluctuate for a broad range of reasons — such as the overall strength of the

economy or demand for particular products or services. Stock funds are of different types,

some of which are given below:

Growth funds focus on stocks that may not pay a regular dividend but have the potential for

large capital gains.

Income funds invest in stocks that pay regular dividends.

Index funds aim to achieve the same return as a particular market index, such as the S&P

500 Composite Stock Price Index, by investing in all — or perhaps a representative sample

— of the companies included in an index.

Specialty funds invest only in companies of the same sector or region.

Sector funds may specialize in a particular industry segment, such as technology or

consumer products stocks.

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Money Market Funds

Funds invest insecurities of 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 issued by governments, Certificate of Deposits issued by

banks and Commercial Paper issued by companies.The major strengths of money

market funds are the liquidity and safety of principal that the investors can normally

expect from short term investments.

Gilt Funds

Gilts are the governments securities with medium to long term maturities typically of

over one year (under one year instruments being money market securities ). In India,

we have now seen the emergence of government securities or gilt funds that invest in

government paper called dated securities. Since the issuer is the government ,these

funds have little risk of default and hence offer better protection of principal.

However , investors have to recognize the potential changes in values of debt

securities held by the funds that are caused by changes .in the market price of debt

securities held by the funds that are caused by changes in the market price of debt

securities quoted on the stock exchanges.

.

Debt Funds (Income Funds)

These funds invest in debt instruments issued not only by the governments, but also

by private companies, banks and financial institutions and other entities such as

infrastructure companies. By investing in debt these funds target low risk and stable

income for the investor as their key objectives.

Debt funds are largely considered as income funds as they do not target capital

appreciation, look for high current income and therefore distribute a substantial part

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of their surplus to investors . The income funds fall largely in the category of debt

funds as they invest primarily in fixed income generating debt instruments

Diversified Debt Fund

A debt fund that invests in all available types of debt securities, issued by entities

across all industries and sectors is properly diversified debt fund. While debt fund

offer high income and less risk as compared to equity funds, investors need to

recognize that debt securities are subject to risk of default by the issuer on

payment of interest or principal. A diversified debt fund has the benefit of risk

reduction through diversification and sharing of any default related losses by a

large number of investors. Hence the diversified debt fund is less risky than the

sect oral funds.

Focused Debt Fund

Some debt funds have a narrower focus, with less diversification in its investment

.Examples include sector ,specialized and off shore debt funds. These are much

similar to the equity funds that these are less income oriented oriented and less

riskier

High Yield Debt Funds

Usually debt funds control the borrower default risk by investing in securities

issued by the borrowers who are rated by the credit rating agencies and are

considered to be of “investment grade”. There are however, high yield debt

funds that seek to obtain higher interest returns by investing in the debt

instruments that are considered “below investment grade”. These funds are

exposed to greater risks.

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Assured Return Funds – An Indian Variant

Fundamentally ,mutual funds hold assets in trust for investors. All returns and

risks are for account of the investors. The role of the fund manager is to provide

the professional management service and to ensure the highest possible return

consistent with the investment objective of the fund. The fund manager or the

trustees do not give any guarantee of any minimum return to the investor.

However in India, historically the UTI offered assured return to the investor. If

there is any shortfall it will be borne by the sponsor.

While Assured Return funds may certainly be considered to be the lowest risk

type within the debt fund category, they are not entirely risk free, as the investors

normally lock in their funds for the term of scheme or at least a specific period of

time. During this period, changes in the financial market may result in the investor loosing

their money.

Fixed Term Plan Series

A mutual fund would normally be either open ended or close ended . However

in India, mutual funds have evolved an innovative middle option between the two,

in response to the investor needs.

Fixed Term Plan Series are essentially close ended in nature . In that the mutual

fund AMC issues a fixed number of units for each series only for once and closes

the issue after an initial offering period like a close end scheme offering.

However a close ended scheme would normally make a one time initial offering

of units , for a fixed duration generally exceeding a year. Investors have to hold

the units until the end of the stated duration or sell them on a stock exchange if

listed. Fixed Term Plans are close end but usually for shorter term less than a

year . Of course like any close end fund each plan series can be wounded earlier

under certain regulatory conditions.

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Equity Funds

As investors move from debt funds category to equity funds , they face increased risk

level . However there are a large variety of equity funds and all of them are not

equally risk prone. Investor and their advisors need to sort out and select the right

equity fund that risk appetite.

Equity funds invest a major portion of their corpus in equity shares issued by the

companies, acquired directly in initial public offerings or through the secondary

market . Equity funds would be exposed to the equity price fluctuations risk at the

market level , at the industry or the sector level and the company specific

level .Equity Funds NAV fluctuates with all these price movement. These price

movements are caused by all kinds of external factors, political and social as well

economic. The issuers of equity shares offer no guaranteed repayments in case of debt

instruments. Hence ,equity funds are generally considered at the higher end of the risk

spectrum among all funds available in the market. On the other hand, unlike debt

instruments that offer fixed amounts of repayments , equities can appreciate in value

in line with the issuers’ earning potential and so offer the greatest potential for growth

in capital.

Equity funds adopt different investment strategies resulting in different levels of risk.

Hence they are generally separated into different types in terms of their investment

styles. Some of these equity funds are as under :

Growth Funds

Growth funds invest in companies whose earnings are expected to rise at an average.

These companies may be operating in sectors like technology considered having a

growth potential, but not entirely unproven and speculative. The primary objective of

growth fund is capital appreciation over a span of 3 to 5 years. Growth funds are

therefore les volatile than funds that target aggressive growth.

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Specialty Funds

These funds have a narrower portfolio orientation and invest only in companies that

meet pre determined criteria. Some funds may build portfolio that will exclude

Tobacco companies. Within the specialty funds category some funds may be broad

based in terms of investments in the portfolio. However most specialty

funds tend to be concentrated funds, since diversification is limited to one type of

investment. Clearly concentrated specialty fund tend to be more volatile than the

diversified funds.

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Diversified Equity Funds

A fund that seeks to invest only in equities for a very small portion in liquid money

market securities but is not focused on any one or few sectors or shares may be

termed as diversified equity funds. While exposed to all equity risks, diversified

equity funds seek to reduce the sector or stock specific risks through diversifications.

They have mainly market risk exposure. Such general purpose but diversified funds

are clearly at the lower risk level than growth funds.

Equity Linked Savings Scheme

In India the investors have been given tax concessions to encourage them to invest in

equity markets through these special schemes. Investments in these schemes entitles

the investors to claim an income tax rebate, but usually has a lock in period before the

end of which funds cannot be withdrawn. These funds are subject to the general SEBI

investment guidelines for all equity funds and would be in the Diversified Equity

Fund category. However as there are no specific restrictions on which sectors these

funds ought to invest in ,investors should clearly look for where the AMC proposes to

invest and accordingly judge the level of risk involved.

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Equity Index Funds

An index fund tracks the performance of a specific stock market index. The objective

is to match the performance of the stock market by tracking an index that represents

the overall market. The fund invests in shares that constitutes the index in the same

proportion as the index. Since they generally invests in a diversified market index

portfolio these funds take only the overall market risks while reducing the sector and

the stock specific risks through diversifications.

Value Funds

The growth funds that we reviewed above holds shares of the companies with good or

improving profit prospects and aim primarily at capital appreciation. These

concentrate on future growth prospects may be willing to pay high price/ earnings

multiples for companies considered to have good potential. In contrast to the growth

investing other funds follow Value Investing Approach. Value funds try to seek out

fundamentally sound companies whose shares are currently under priced in the

market. Value funds will add only those shares to their portfolios that are selling at

low price earningratios ,low market to book value ratios and are undervalued by other

yardsticks.

Value funds have the equity market price fluctuation risks, but stand often at a lower

end of the risk spectrum in comparison with the growth funds. Value stocks may be

from a large number of sectors and therefore diversified.

Equity Income Funds

Usually income funds are in the debt funds category, as they target fixed income

investments . However there are equity funds that can be designed to give the

investors a high level of current income along with some steady capital appreciation,

investing mainly in shares of companies with high dividend yields.

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As an example an equity income fund would invest largely in power/ utility

companies shares of established companies that pay higher dividend and whose price

do not fluctuate as much as the other shares. These equity funds should therefore be

less volatile and less risky than nearly all other equity funds.

Hybrid Funds

We have seen that in terms of the nature of financial securities held, there are three

major mutual fund types :money market , debt and equity. Many mutual fund mix

these different types of securities in their portfolios. Thus, most funds equity or debt

always have some money market securities in their portfolios as these securities offer

the much needed liquidity. However money market holdings will constitute a lower

proportion in the overall portfolios. These are the funds that seek to hold a relatively

balanced holdings of debt or equity in their portfolios. Such funds are termed as

“hybrid funds” as they have a dual equity/ bond focus.

Balanced Funds

A balanced fund is the one that has a portfolio comprising debt instruments,

convertible securities, preference and equity shares. Their assets are generally held in

more or less equal proportion between debt / money market securities and equities. By

investing in a mix of this nature, balanced funds seek to attain the objectives of the

income, moderate capital appreciation and preservation of capital and are ideal for

investors with a conservative and long term orientation.

Growth and Income Funds

Unlike income or growth focused funds ,these funds seek to strike a balance between

capital appreciation and income for the investor. Their portfolios are a mix between

companies with good dividends paying records and those with potential for capital

appreciation. These funds would be less risky than the pure growth funds though more

risky than the income funds.

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Why Invest in a Mutual Fund?

Mutual funds make saving and investing simple, accessible, and affordable. Mutual fund

offers certain advantages to individual, amateur investors who trade in small denominations.

Professional management: Theoretically, professional money managers research, select

and monitor the performance of the securities the fund purchases. The mutual fund will have

a fund manager that trades the pooled money on a regular basis. Thus investors who don‘t

have the time or expertise to manage their portfolios find MFs convenient as it is a relatively

inexpensive way of getting a full-time manager to make and monitor investments for them.

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Diversification:Mutual funds typically own several different stocks in many different

industries, sometimes going up to a hundred different stocks in large sized mutual funds. It

enables diversification and spreading of risk by investing in a portfolio of securities

belonging to industries having inversely correlated income streams.

Economies of Scale:Since mutual funds buy and sell a large amount of securities at a time,

its transaction costs are lower than what an individual investor would pay for trading in

securities. Also, because of the ‗pooling‘ of funds, individual investors can make investments

in small denominations in the securities market which is not possible if they invest on their

own.

Liquidity: Just like an individual stock, a mutual fund allows its investors to readily

redeem their shares at the current NAV — plus any fees and charges assessed on redemption

— at any time. The price per share at which the investors can redeem shares is known as the

fund‘s net asset value (NAV). NAV is the current market value of all the fund‘s assets, minus

liabilities, divided by the total number of outstanding shares.

Convenience:An investor can purchase or sell fund shares directly from a fund or through

a broker, financial planner, bank or insurance agent, by mail, over the telephone, and

increasingly by personal computer. He can also arrange for automatic reinvestment or

periodic distribution of the dividends and capital gains paid by the fund. Funds may offer a

wide variety of other services, including monthly or quarterly account statements, tax

information, and 24-hour phone and computer access to fund and account information.

Protecting Investors:Not only are mutual funds subject to compliance with their self-

imposed restrictions and limitations, they are also highly regulated by the federal government

through the U.S. Securities and Exchange Commission (SEC). As part of this government

regulation, all funds must meet certain operating standards, observe strict antifraud rules, and

disclose complete information to current and potential investors. These laws are strictly

enforced and designed to protect investors from fraud and abuse.

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Disadvantages of Mutual funds

Hidden costs: The 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

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, mutual funds must calculate their NAV at least once every business day,

typically after the major U.S. exchanges close.

Taxes:Fund managers don't consider personal tax situation while making decisions

regarding the fund. For example, when a fund manager sells a security, a capital-gains tax is

triggered, which affects the profitability of an individual investor from the sale. It might have

been more advantageous for the individual to defer the capital gains liability

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Structure of Mutual Funds

A mutual fund is usually either a corporation or a business trust (which is like a corporation).

Like any corporation, a mutual fund is owned by its shareholders. Virtually all mutual funds

are externally managed; they do not have employees of their own. Instead, their operations

are conducted by affiliated organizations and independent contractors.

Other Types of Investment Companies

Mutual funds are one of four types of investment companies; the other three are open-end

fund, closed-end funds and unit investment trusts.

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HISTORY OF INDIAN MUTUAL FUND INDUSTRY

The 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. Though the growth was slow,

but it accelerated from the year 1987 when non-UTI players entered the Industry. In the past

decade, Indian mutual fund industry had seen a dramatic improvement, both qualities wise as

well as quantity wise. Before, the monopoly of the market had seen anending phase; the

Assets Under Management (AUM) was Rs67 billion. The private sector entry to the fund

family raised the Aum to Rs. 470 billion in March 1993 and till April 2004; it reached the

height if Rs. 1540 billion.

The Mutual Fund Industry is obviously growing at a tremendous space with the mutual fund

industry can be broadly put into four phases according to the development of the sector. Each

phase is briefly described as under.

First Phase – 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament 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.6,700crores of assets under management.

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

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks

and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India

(GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987

followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89),

Indian Bank Mutual Fund (Nov 89), Bank of India (Jun90), Bank of Baroda Mutual Fund

(Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund

32

in December 1990.At the end of 1993, the mutual fund industry had assets under

management of Rs.47,004crores.

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

1993 was the year in which the first Mutual Fund Regulations came into being, under which

all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari

Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund

registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a

more comprehensive and revised Mutual Fund Regulations in 1996. The industry now

functions under the SEBI (Mutual Fund) Regulations 1996. As at the end of January 2003,

there were 33 mutual funds with total assets of Rs. 1,21,805crores.

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.29,835crores as at the end of January 2003,

representing broadly, the assets of US 64 scheme, assured return and certain other schemes

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is

registered with SEBI and functions under the Mutual Fund Regulations.Consolidation and

growth. As at the end of September, 2004, there were 29 funds, which manage assets of

Rs.153108crores under 421 schemes.

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CURRENT SCENARIO:

The fund industry has grown phenomenally over the past couple of years, and as on 31

January 2008, it had a debt and equity assets of Rs 5,50,157 crore. Its equity corpus of Rs

2,20,263 lakh crore accounts for over 3 per cent of the total market capitalization of BSE, at

Rs 58 lakh crore. Its holding in Indian companies ranges between 1 per cent and almost 29

per cent, making them an influential shareholder. Together with banks, insurance

companies and FIIs- collectively called institutional investors- they have the ability to ask

company managements some tough questions.

More significant than this stupendous growth has been the regulatory changes that the capital market

watchdog, Securities and Exchange Board of India, introduced in the past two years. Outgoing Sebi Chairman

M.Damodaran’s two year stint as chairman of Unit Trust of India helped him reform the industry by making it

much more transparent than before. In the process, mutual funds have become a tad cheaper.

Until 2007, for instance, initial issue expenses on close-ended funds, which could be as high as 6 per cent of

the amount raised, could be amortized over the tenure of the fund. This basically meant that even if an

investor put in Rs 1 lakh, effectively only Rs 94,000 got invested by the fund. The initial expenses of the fund

include commissions paid to distributors and money spent on billboards for advertising the new offer. In 2006,

the regulator had scrapped the amortization benefit for open-ended schemes. Not surprisingly, asset

management companies started launching closed-ended funds. Of the 34 new fund offers in 2007, 24 were

closed-ended. In January this year, SEBI said all closed-ended mutual fund schemes too will meet sales and

marketing expenses from the entry load. This made it more transport for investors, because funds had to

either hike their expense ratio (management fee and operating charges as a percentage of assets under

management) or change higher entry load.

34

More About Mutual funds

According to SEBI "Mutual Fund" means a fund established in the form of a trust to raise

monies through the sale of units to the public or a section of the public under one or more

schemes for investing in securities, including money market instruments;"

To the ordinary individual investor lacking expertise and specialized skill in dealing

proficiently with the securities market a Mutual Fund is the most suitable investment forum

as it offers an opportunity to invest in a diversified, professionally managed basket of

securities at a relatively low cost. India has a burgeoning population of middle class now

estimated around 300 million. A typical Indian middle class family can pool liquid savings

ranging from Rs.2 to Rs.10 Lacs. Investment of this money in Banks keeps the fund liquid

and safe, but with the falling rate of interest offered by Banks on Deposits, it is no longer

attractive. At best a small part can be parked in bank deposits, but what are the other

sources of remunerative investment possibilities open to the common man? Mutual Fund is

the ready answer, as direct PMS investment is out of the scope of these individuals. Viewed

in this sense India is globally one of the best markets for Mutual Fund Business, so also for

Insurance business. This is the reason that foreign companies compete with one another in

setting up insurance and mutual fund business shops in India. The sheer magnitude of the

population of educated white-collar employees with raising incomes and a well-organized

stock market at par with global standards, provide unlimited scope for development of

financial services based on PMS like mutual fund and insurance.

The alternative to mutual fund is direct investment by the investor in equities and bonds or

corporate deposits. All investments whether in shares, debentures or deposits involve risk:

share value may go down depending upon the performance of the company, the industry,

state of capital markets and the economy. Generally, however, longer the term, lesser is the

risk. Companies may default in payment of interest/ principal on their

debentures/bonds/deposits; the rate of interest on an investment may fall short of the rate

of inflation reducing the purchasing power. While risk cannot be eliminated, skillful

management can minimise risk. Mutual Funds help to reduce risk through diversification

and professional management. The experience and expertise of Mutual Fund managers in

selecting fundamentally sound securities and timing their purchases and sales help them to

build a diversified portfolio that minimises risk and maximises returns.

35

Chapter III

Company Profile

36

INTRODUCTION TO SBI MUTUAL FUND

SBI Funds Management Pvt. Ltd. is one of the leading fund houses in

the country with an investor base of over 4.6 million and over 20 years

of rich experience in fund management consistently delivering value to

its investors. SBI Funds Management Pvt. Ltd. is a joint venture between

'The State Bank of India' one of India's largest banking enterprises, and

Société Générale Asset Management (France), one of the world's leading

fund management companies that manages over US$ 500 Billion

worldwide.

Today the fund house manages over Rs 28500 crores of assets and has a

diverse profile of investors actively parking their investments across 36

active schemes. In 20 years of operation, the fund has launched 38

schemes and successfully redeemed 15 of them, and in the process, has

rewarded our investors with consistent returns. Schemes of the Mutual

Fund have time after time outperformed benchmark indices, honored us

with 15 awards of performance and have emerged as the preferred

investment for millions of investors. The trust reposed on us by over 4.6

million investors is a genuine tribute to our expertise in fund

management.

SBI Funds Management Pvt. Ltd. serves its vast family of investors

through a network of over 130 points of acceptance, 28 Investor Service

Centres, 46 Investor Service Desks and 56 District Organizers.SBI

37

Mutual is the first bank-sponsored fund to launch an offshore fund – Resurgent

India Opportunities Fund.

Growth through innovation and stable investment policies is the SBI MF credo.

PRODUCTS OF SBI MUTUAL FUND

Equity schemes

The investments of these schemes will predominantly be in the stock

markets and endeavor will be to provide investors the opportunity to

benefit from the higher returns which stock markets can provide.

However they are also exposed to the volatility and attendant risks of

stock markets and hence should be chosen only by such investors who

have high risk taking capacities and are willing to think long term.

Equity Funds include diversified Equity Funds, Sectoral Funds and

Index Funds. Diversified Equity Funds invest in various stocks across

different sectors while sectoral funds which are specialized Equity

Funds restrict their investments only to shares of a particular sector and

hence, are riskier than Diversified Equity Funds. Index Funds invest

passively only in the stocks of a particular index and the performance of

such funds move with the movements of the index.

Magnum COMMA Fund

Magnum Equity Fund

Magnum Global Fund

Magnum Index Fund

38

Magnum Midcap Fund

Magnum Multicap Fund

Magnum Multiplier plus 1993

Magnum Sectoral Funds Umbrella

MSFU- Emerging Business Fund

MSFU- IT Fund

MSFU- Pharma Fund

MSFU- Contra Fund

MSFU- FMCG Fund

SBI Arbitrage Opportunities Fund

SBI Blue chip Fund

SBI Infrastructure Fund - Series I

SBI Magnum Taxgain Scheme 1993

SBI ONE India Fund

SBI TAX ADVANTAGE FUND - SERIES I

Debt schemes

Debt Funds invest only in debt instruments such as Corporate Bonds,

Government Securities and Money Market instruments either

completely avoiding any investments in the stock markets as in Income

Funds or Gilt Funds or having a small exposure to equities as in

Monthly Income Plans or Children's Plan. Hence they are safer than

equity funds. At the same time the expected returns from debt funds

39

would be lower. Such investments are advisable for the risk-averse

investor and as a part of the investment portfolio for other investors.

Magnum Children’s benefit Plan

Magnum Gilt Fund

Magnum Income Fund

Magnum Insta Cash Fund

Magnum Income Fund- Floating Rate Plan

Magnum Income Plus Fund

Magnum Insta Cash Fund -Liquid Floater Plan

Magnum Monthly Income Plan

Magnum Monthly Income Plan - Floater

Magnum NRI Investment Fund

SBI Premier Liquid Fund

BALANCED SCHEMES

Magnum Balanced Fund invests in a mix of equity and debt

investments. Hence they are less risky than equity funds, but at the same

time provide commensurately lower returns. They provide a good

investment opportunity to investors who do not wish to be completely

exposed to equity markets, but is looking for higher returns than those

provided by debt funds.

Magnum Balanced Fund

40

COMPETITORS OF SBI MUTUAL FUND

Some of the main competitors of SBI Mutual Fund in Dehradoon are as

Follows:

i. ICICI Mutual Fund

ii. Reliance Mutual Fund

iii. UTI Mutual Fund

iv. Birla Sun Life Mutual Fund

v. Kotak Mutual Fund

vi. HDFC Mutual Fund

vii. Sundaram Mutual Fund

viii. LIC Mutual Fund

ix. Principal

x. Franklin Templeton

41

AWARDS AND ACHIEVEMENTS

SBI Mutual Fund (SBIMF) has been the proud recipient of the ICRA Online

Award - 8 times, CNBC TV - 18 Crisil Award 2006 - 4 Awards, The Lipper

Award (Year 2005-2006) and most recently with the CNBC TV - 18 Crisil

Mutual Fund of the Year Award 2007 and 5 Awards for our schemes.

42

43

Chapter IV

Research Methodology

44

RESEARCH METHODOLOGY

The nature of the study is descriptive research. This report is based on secondary information

that are collected from published as well as un-published sources. One of the most important

users of research methodology is that it helps in identifying the problem, collecting,

analyzing the required information data and providing an alternative solution to the

problem .It also helps in collecting the vital information that is required by the top

management to assist them for the better decision making both day to day decision and

critical ones.

DATA SOURCES

The secondary data has been collected through various journals and websites. Various journals and magazines were referred during this course of study.

www.ebay.com

www.google.com

www.yahoo.co.in

Magazines-

India today

Outlook

Business today

Newspaper-

Times of india

Hindustan times

The hindu

Economic times

45

Chapter V

RECENT TRENDS IN

THE MUTUAL FUNDS

46

RECENT TRENDS IN THE MUTUAL FUND INDUSTRY

The most important trend in the mutual fund industry is the aggressive expansion of the

foreign owned mutual fund companies and the decline of the companies floated by the

nationalized banks and smaller private sector players.

Many nationalized banks got into the mutual fund business in the early nineties and got off

to a start due to the stock market boom was prevailing. These banks did not really

understand the mutual fund business and they just viewed it as another kind of banking

activity. Few hired specialized staff and generally chose to transfer staff from the parent

organizations. The performance of most of the schemes floated by these funds was not

good. Some schemes had offered guaranteed returns and their parent organizations had to

bail out these AMCs by paying large amounts of money as a difference between the

guaranteed and actual returns. The service levels were also very bad. Most of these AMCs

have not been able to retain staff, float new schemes etc.

REGULATORY BODIES

SECURITIES EXCHANGE BOARD OF INDIA

Mutual Funds in India are comprehensively regulated under the SEBI (Mutual Funds)

Regulation, 1996; some of the important provisions are as follows:

A Mutual Fund shall be constituted in the form of a trust executed by the sponsor in

favour of the trustees.

The sponsor or, if so authorized by the trust deed, the trustees, shall appoint an asset

management company.

The Mutual Fund shall appoint a custodian.

No scheme shall be launched by the AMC unless it is approved by the trustees and the

copy of the offer document has been filed with SEBI.

The offer document and the advertisement materials shall not be misleading.

No guaranteed return shall be provided in the scheme unless such returns are fully

guaranteed by the sponsor or AMC.

47

The moneys collected under any scheme of Mutual Fund shall be invested only on

transferable certificates.

The money collected under any money market scheme of Mutual Fund shall be

invested only in money market instruments in accordance with the direction issued by

the Reserve Bank of India.

The Mutual Funds cannot be borrowed except to meet temporary liquidity needs.

The NAV and the sale and the repurchase price of Mutual Funds scheme must be

regularly published in daily newspapers.

Every AMC shall keep and maintain proper books of accounts records, documents for

each scheme.

ASSOCIATION OF MUTUAL FUNDS OF INDIA

With the increase in mutual fund players in India, a need for mutual fund association in India

was generated to function as a non-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 SEBI. Till date all the AMCs are that have launched mutual fund schemes are

its members. It functions under the supervision and guidelines of board of directors. AMFI

has brought down the Indian Mutual Fund Industry to a professional and healthy market with

ethical lines enhancing and maintaining standards. It follows the principle of both protecting

and promoting the interest of mutual funds as well as their unit holders. 

 

It has been a forum where mutual funds have been able to present their views, debate and

participate in creating their own regulatory framework. The association was created originally

as a body that would lobby with the regulator to ensure that the fund viewpoint was heard.

Today, it is usually the body that is consulted on matters long before regulations are framed,

and it often initiates many regulatorychanges that prevent malpractices that emerge from time

to time.

AMFI works through a number of committees, some of which are standing committees to

address areas where there is a need for constant vigil and improvements and other which are

adhoc committees constituted to address specific issues. These committees consist of industry

professionals from among the member mutual funds. There is now some thought that AMFI

48

should become a self-regulatory organization since it has worked so effectively as an industry

body.

The main objectives of AMFI are as follows:

To define and maintain high professional and ethical standards in all areas of operation

of the mutual fund industry.

To recommend and promote best business practices and code of conduct to be

followed by members and others engaged in the activities of mutual fund and

assetmanagement including agencies connected or involved in the field of capital

markets.

 

To interact with the Securities and Exchange Board of India (SEBI) and to represent

to SEBI on all matters concerning the mutual fund industry.

 

To represent to the Government, Reserve Bank of India and other bodies on all

matters relating to the Mutual Fund Industry.

 

To develop a cadre of well trained Agent distributors and to implement a programme

of training and certification for all intermediaries and other engaged in the industry.

 

To undertake nationwide investor awareness programme so as to promote proper

understanding of the concept and working of mutual funds.

 

To disseminate information on Mutual Fund Industry and to undertake studies and

research directly and/or in association with other bodies.

49

PERFORMANCE MEASURES OF MUTUAL FUNDS

Mutual Fund industry today, with about 34 players and more than five hundred

schemes, is one of the most preferred investment avenues in India. However, with a

plethora of schemes to choose from, the retail investor faces problems in selecting

funds. Factors such as investment strategy and management style are qualitative, but

the funds record is an important indicator too. Though past performance alone

cannot be indicative of future performance, it is, frankly, the only quantitative way to

judge how good a fund is at present. Therefore, there is a need to correctly assess the

past performance of different mutual funds.

Worldwide, good mutual fund companies over are known by their AMCs and this

fame is directly linked to their superior stock selection skills. For mutual funds to

grow, AMCs 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 AMCs.

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

performance of a mutual fund scheme, it should also include the risk taken by the

fund manager because different funds will have different levels of risk attached to

them. Risk associated with a fund, in a general, can be defined as variability or

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

of a fund during a given period, higher will be the risk associated with it. These

fluctuations in the returns generated by a fund are resultant of two guiding forces.

First, general market fluctuations, which affect all the securities present in the

market, called market risk or systematic risk and second, fluctuations due to specific

securities present in the portfolio of the fund, called unsystematic risk. The Total Risk

of a given fund is sum of these two and is measured in terms of standard deviation of

returns of the fund. Systematic risk, on the other hand, is measured in terms of Beta,

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

responsive the NAV of a mutual fund is to the changes in the market; higher will be its

beta. Beta is calculated by relating the returns on a mutual fund with the returns in

the market. While unsystematic risk can be diversified through investments in a

number of instruments, systematic risk can not. By using the risk return relationship,

50

we try to assess the competitive strength of the mutual funds vis-à-vis 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:

Ø The Treynor Measure

Ø The Sharpe Measure

Ø Jenson Model

ØFama Model

51

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, Rfis risk free rate of return and Biis 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.

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.

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-

52

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.

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 fund 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, Rm is average market return during the given period. 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.

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 return 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)

53

Where, Sm is standard deviation of market returns. 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 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 diversified. 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.

54

RISK FACTOR

All investments involve some form of risk. Even an insured bank account is subject to

the possibility that inflation will rise faster than your earnings, leaving you with less

real purchasing power than when you started (Rs. 1000 gets you less than it got your

father when he was your age).

The discussion on investment objectives would not be complete without a discussion

on the risks that investing in a mutual fund entails.

At the cornerstone of investing is the basic principle that the greater the risk you

take, the greater the potential reward. Remember that the value of all financial

investments will fluctuate. Typically, risk is defined as short-term price variability. But

on a long-term basis, risk is the possibility that your accumulated real capital will be

insufficient to meet your financial goals. And if you want to reach your financial goals,

you must start with an honest appraisal of your own personal comfort zone with

regard to risk. Individual tolerance for risk varies, creating a distinct "investment

personality" for each investor. Some investors can accept short-term volatility with

ease, others with near panic. So whether you consider your investment temperament

to be conservative, moderate or aggressive, you need to focus on how comfortable or

uncomfortable you will be as the value of your investment moves up or down.

Managing risks

Mutual funds offer incredible flexibility in managing investment risk. Diversification

and Systematic Investing Plan (SIP) are two key techniques you can use to reduce

your investment risk considerably and reach your long-term financial goals.

Diversification

When you invest in one mutual fund, you instantly spread your risk over a number of

different companies. You can also diversify over several different kinds of securities

by investing in different mutual funds, further reducing your potential risk.

Diversification is a basic risk management tool that you will want to use throughout

your lifetime as you rebalance your portfolio to meet your changing needs and goals.

Investors, who are willing to maintain a mix of equity shares, bonds and money

market securities have a greater chance of earning significantly higher returns over

55

time than those who invest in only the most conservative investments. Additionally, a

diversified approach to investing -- combining the growth potential of equities with

the higher income of bonds and the stability of money markets -- helps moderate

your risk and enhance your potential return.

56

Types of risks:

Consider these common types of risk and evaluate them against potential rewards

when you select an investment.

Market Risk

At times the prices or yields of all the securities in a particular market rise or fall due

to broad outside influences. When this happens, the stock prices of both, an

outstanding, highly profitable company and a fledgling corporation may be affected.

This change in price is due to "market risk.”

Inflation Risk

Sometimes referred to as "loss of purchasing power." Whenever inflation sprints

forward faster than the earnings on your investment, you run the risk that you'll

actually be able to buy less, not more. Inflation risk also occurs when prices rise faster

than your returns.

Credit Risk

In short, how stable is the company or entity to which you lend your money when

you invest? How certain are you that it will be able to pay the interest you are

promised, or repay your principal when the investment matures?

Interest Rate Risk

Changing interest rates affect both equities and bonds in many ways. Investors are

reminded that "predicting" which way rates will go is rarely successful. A diversified

portfolio can help in offsetting these changes.

Effect of loss of key professionals and inability to adapt business to the rapid

technological change

An industries' key asset is often the personnel who run the business i.e. intellectual

properties of the key employees of the respective companies. Given the ever-

changing complexion of few industries and the high obsolescence levels, availability

of qualified, trained and motivated personnel is very critical for the success of

industries in few sectors. It is, therefore, necessary to attract key personnel and also

57

to retain them to meet the changing environment and challenges the sector offers.

Failure or inability to attract/retain such qualified key personnel may impact the

prospects of the companies in the particular sector in which the fund invests.

Exchange Risks

A number of companies generate revenues in foreign currencies and may have

investments or expenses also denominated in foreign currencies. Changes in

exchange rates may, therefore, have a positive or negative impact on companies

which in turn would have an effect on the investment of the fund.

I nvestment Risks

The sectoral fund schemes, investments will be predominantly in equities of select

companies in the particular sectors. Accordingly, the NAV of the schemes are linked

to the equity performance of such companies and may be more volatile than a more

diversified portfolio of equities.

Changes in the Government Policy

Changes in Government policy especially in regard to the tax benefits may impact the

business prospects of the companies leading to an impact on the investments made

by the fund.

58

Financial planning for investors( ref. to mutual funds):

Investors are required to go for financial planning before making investments in any mutual

fund. The objective of financial planning is to ensure that the right amount of money is

available at the right time to the investor to be able to meet his financial goals. It is more than

mere tax planning. Steps in financial planning are:

Asset allocation.

Selection of fund.

Studying the features of a scheme.

In case of mutual funds, financial planning is concerned only with broad asset allocation,

leaving the actual allocation of securities and their management to fund managers. A fund

manager has to closely follow the objectives stated in the offer document, because financial

plans of users are chosen using these objectives.

Why has it become one of the largest financial instruments?

If we take a look at the recent scenario in the Indian financial market then we can find the

market flooded with a variety of investment options which includes mutual funds, equities,

fixed income bonds, corporate debentures, company fixed deposits, bank deposits, PPF, life

insurance, gold, real estate etc. all these investment options could be judged on the basis of

various parameters such as- return, safety convenience, volatility and liquidity. measuring

these investment options on the basis of the mentioned parameters, we get this in a tabular

form

Return  Safety  Volatility  Liquidity  Convenienc

e 

Equity  High  Low  High  High  Moderate 

Bonds  Moderate  High  Moderate  Moderate  High 

59

Co.

Debentures 

Moderate  Moderate  Moderate  Low  Low 

Co. FDs  Moderate  Low  Low  Low  Moderate 

Bank

Deposits 

Low  High  Low  High  High 

PPF  Moderate  High  Low  Moderate  High 

Life

Insurance 

Low  High  Low  Low  Moderate 

Gold  Moderate  High  Moderate  Moderate  Gold 

Real Estate  High  Moderate  High  Low  Low 

Mutual

Funds 

High  High  Moderate  High  High 

We can very well see that mutual funds outperform every other investment option. On three

parameters it scores high whereas it’s moderate at one. comparing it with the other options,

we find that equities gives us high returns with high liquidity but its volatility too is high with

low safety which doesn’t makes it favourite among persons who have low risk- appetite.

Even the convenience involved with investing in equities is just moderate.

Now looking at bank deposits, it scores better than equities at all

fronts but lags badly in the parameter of utmost important ie; it scores low on return , so it’s

not an happening option for person who can afford to take risks for higher return. The other

option offering high return is real estate but that even comes with high volatility and

60

moderate safety level, even the liquidity and convenience involved are too low. Gold have

always been a favourite among Indians but when we look at it as an investment option then it

definitely doesn’t gives a very bright picture. Although it ensures high safety but the returns

generated and liquidity are moderate. Similarly the other investment options are not at par

with mutual funds and serve the needs of only a specific customer group. Straightforward,

we can say that mutual fund emerges as a clear winner among all the options available.

The reasons for this being:

I)Mutual funds combine the advantage of each of the investment products: mutual fund

is one such option which can invest in all other investment options. Its principle of

diversification allows the investors to taste all the fruits in one plate. just by investing in it,

the investor can enjoy the best investment option as per the investment objective.

II)dispense the shortcomings of the other options: every other investment option has more

or les some shortcomings. Such as if some are good at return then they are not safe, if some

are safe then either they have low liquidity or low safety or both….likewise, there exists no

single option which can fit to the need of everybody. But mutual funds have definitely sorted

out this problem. Now everybody can choose their fund according to their investment

objectives.

III) Returns get adjusted for the market movements: as the mutual funds are managed by

experts so they are ready to switch to the profitable option along with the market movement.

Suppose they predict that market is going to fall then they can sell some of their shares and

book profit and can reinvest the amount again in money market instruments.

IV) Flexibility of invested amount: Other then the above mentioned reasons, there exists

one more reason which has established mutual funds as one of the largest financial

intermediary and that is the flexibility that mutual funds offer regarding the investment

amount. One can start investing in mutual funds with amount as low as Rs. 500 through SIPs

and even Rs. 100 in some cases.

61

How do investors choose between funds?

When the market is flooded with mutual funds, it’s a very tough job for the investors to

choose the best fund for them. Whenever an investor thinks of investing in mutual funds, he

must look at the investment objective of the fund. Then the investors sort out the funds whose

investment objective matches with that of the investor’s. Now the tough task for investors

start, they may carry on the further process themselves or can go for advisors like SBI . Of

course the investors can save their money by going the direct route i.e. through the AMCs

directly but it will only save 1-2.25% (entry load) but could cost the investors in terms of

returns if the investor is not an expert. So it is always advisable to go for MF advisors. The

mf advisors’ thoughts go beyond just investment objectives and rate of return. Some of the

basic tools which an investor may ignore but an mf advisor will always look for are as

follow:

1. Rupee cost averaging:

The investors going for Systematic Investment Plans(SIP) and Systematic Transfer

Plans(STP) may enjoy the benefits of RCA (Rupee Cost Averaging). Rupee cost averaging

allows an investor to bring down the average cost of buying a scheme by making a fixed

investment periodically, like Rs 5,000 a month and nowadays even as low as Rs. 500 or Rs.

100. In this case, the investor is always at a profit, even if the market falls. In case if the NAV

of fund falls, the investors can get more number of units and vice-versa. This results in the

average cost per unit for the investor being lower than the average price per unit over time.

The investor needs to decide on the investment amount and the frequency. More frequent the

investment interval, greater the chances of benefiting from lower prices. Investors can also

benefit by increasing the SIP amount during market downturns, which will result in reducing

the average cost and enhancing returns. Whereas STP allows investors who have lump sums

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to park the funds in a low-risk fund like liquid funds and make periodic transfers to another

fund to take advantage of rupee cost averaging. 

2. Rebalancing:

Rebalancing involves booking profit in the fund class that has gone up and investing in the

asset class that is down. Trigger and switching are tools that can be used to rebalance a

portfolio. Trigger facilities allow automatic redemption or switch if a specified event occurs.

The trigger could be the value of the investment, the net asset value of the scheme, level of

capital appreciation, level of the market indices or even a date. The funds redeemed can be

switched to other specified schemes within the same fund house. Some fund houses allow

such switches without charging an entry load. 

To use the trigger and switch facility, the investor needs to specify the event, the amount or

the number of units to be redeemed and the scheme into which the switch has to be made.

This ensures that the investor books some profits and maintains the asset allocation in the

portfolio. 

3. Diversification:

Diversification involves investing the amount into different options. In case of mutual funds,

the investor may enjoy it afterwards also through dividend transfer option. Under this, the

dividend is reinvested not into the same scheme but into another scheme of the investor's

choice.

For example, the dividends from debt funds may be transferred to equity schemes. This gives

the investor a small exposure to a new asset class without risk to the principal amount. Such

transfers may be done with or without entry loads, depending on the MF's policy. 

4. Tax efficiency:

Tax factor acts as the “x-factor” for mutual funds. Tax efficiency affects the final decision of

any investor before investing. The investors gain through either dividends or capital

appreciation but if they haven’t considered the tax factor then they may end loosing.

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Debt funds have to pay a dividend distribution tax of 12.50 per cent (plus surcharge and

education cess) on dividends paid out. Investors who need a regular stream of income have to

choose between the dividend option and a systematic withdrawal plan that allows them to

redeem units periodically. SWP implies capital gains for the investor.

If it is short-term, then the SWP is suitable only for investors in the 10-per-cent-tax bracket.

Investors in higher tax brackets will end up paying a higher rate as short-term capital gains

and should choose the dividend option. 

If the capital gain is long-term (where the investment has been held for more than one year),

the growth option is more tax efficient for all investors. This is because investors can redeem

units using the SWP where they will have to pay 10 per cent as long-term capital gains tax

against the 12.50 per cent DDT paid by the MF on dividends.

All the tools discussed over here are used by all the advisors and have helped investors in

reducing risk, simplicity and affordability. Even then an investor needs to examine costs, tax

implications and minimum applicable investment amounts before committing to a service.

Most popular stocks among fund managers (as on 30th April 2008)

Company Name no. of funds Reliance industries limited 244Larsen & toubro limited 206ICICI bank limited 202State bank of India 188Bharti airtel limited 184Bharat heavy electricals limited 200Reliance communication ventures ltd 169Infosys technologies ltd 159Oil& Natural gas corporation ltd. 153ITC ltd. 143

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We can easily point out that reliance industries limited emerges as a true winner over here

attracting the attention of almost244 managers well followed by Larsen & toubro ltd ICICI

bank ltd and Bharat heavy electricals ltd. The other companies succeeding in getting a place

at top 10 are SBI, Bharti airtel limited, reliance communications, Infosys technologies

limited, ONGC and at last ITC ltd.

What are the most lucrative sectors for mutual fund managers?

This is a question of utmost interest for all the investors even for those who don’t invest in

mutual funds. Because the investments done by the MFs acts as trendsetters. The investments

made by the fund managers are used for prediction. Huge investments assure liquidity and

reflects appositive picture whereas tight investment policy reflects crunch and investors may

look forward for a gloomy picture.

Their investments show that which sector is hot? And will set the market trends. The expert

management of the funds will always look for profitable and high paying sectors. So we can

have a look at most lucrative sectors to know about the recent trends:

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Sector name No. of MFs betting on itautomotive 255banking & financial services

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cement & construction 237consumer durables 51conglomerates 218chemicals 259consumer non durables 146engineering & capital goods

317

food & beverages 175information technology 284media & entertainment 218Manufacturing 259metals& mining 275Miscellaneous 250oil & gas 290Pharmaceuticals 250Services 200Telecom 264Tobacco 150Utility 225

From the above data collected we can say that engineering & capital goods sector has

emerged as the hottest as most of the funds are betting on it. We can say that this sector is on

boom and presents a bright picture. Other than it other sectors on height are oil & gas,

telecom, metals & mining and information technology. Sectors performing average are

automotive, cement & construction, chemicals, media & entertainment, manufacturing,

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miscellaneous, pharmaceuticals and utility. The sectors which are not so favourite are

banking & financial services, conglomerates, consumer non- durables, food & beverages,

services and tobacco. And the sector which failed to attract the fund managers is consumer

durables with just 51 funds betting on it.

Thus this analysis not only gives a picture of the mindset of fund managers rather it also

reflects the liquidity existing in each of the sectors. It is not only useful for investors of

mutual funds rather the investors of equity and debt too could take a hint from it. Asset

allocation by fund managers are based on several researches carried on so, it is always

advisable for other investors too take a look on it. It can be further presented in the form of a

graph as follow:

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Systematic investment plan (in details)

We have already mentioned about SIPs in brief in the previous pages but now going into

details, we will see how the power of compounding could benefit us. In such case, every

small amounts invested regularly can grow substantially. SIP gives a clear picture of how an

early and regular investment can help the investor in wealth creation. Due to its unlimited

advantages SIP could be redefined as “a methodology of fund investing regularly to benefit

regularly from the stock market volatility. In the later sections we will see how returns

generated from some of the SIPs have outperformed their benchmark. But before moving on

to that lets have a look at some of the top performing SIPs and their return for 1 year:

Scheme Amount NAV NAV Date Total Amount

Reliance diversified power sector retail 1000 62.74 30/5/2008 14524.07Reliance regular savings equity 1000 22.208 30/5/2008 13584.944principal global opportunities fund 1000 18.86 30/5/2008 14247.728DWS investment opportunities

fund 1000 35.31 30/5/2008 13791.157

BOB growth fund 1000 42.14 30/5/2008 13769.152

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In the above chart, we can see how if we start investing Rs.1000 per month then what return

we’ll get for the total investment of Rs. 12000. There is reliance diversified power sector

retail giving the maximum returns of Rs. 2524.07 per year which comes to 21% roughly.

Next we can see if anybody would have undertaken the SIP in Principal would have got

returns of app. 18%. We can see reliance regular savings equity, DWS investment

opportunities and BOB growth fund giving returns of 13.20%, 14.92%, and 14.74%

respectively which is greater than any other monthly investment options. Thus we can easily

make out how SIP is beneficial for us. Its hassle free, it forces the investors to save and get

them into the habit of saving. Also paying a small amount of Rs. 1000 is easy and convenient

for them, thus putting no pressure on their pockets.

Now we will analyze some of the equity fund SIP s of Birla Sunlife with BSE 200 and bank

fixed deposits In a tabular format as well as graphical.

Scheme Name

NO. OF

INSTALMENTS Original inv Returns at BSE 200 FUND RETURNS

Birla SL tax relief '96 144 144000 553190 1684008

Birla SL equity fund 114 114000 388701 669219Birla frontline equity fund 66 66000 156269 181127

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In the above case, we have taken three funds of Birla sunlife namely Birla sunlife tax relief

’96, Birla sunlife equity fund and Birla sunlife frontline equity fund. All these three funds

follow the same benchmark ie; BSE 200. Here, we have shown how one would have

benefitted if he would have put his money into these schemes since their inception. And the

amount even is a meager Rs. 1000 per month.

Starting from Birla frontline equity fund, we could spot that if someone would have invested

Rs. 1000 per month resulting into total investment of Rs. 66000 then it would have amounted

to rs.156269 if invested in BSE 200 whereas the fund would have given a total return of Rs

181127. Now moving next to Birla sunlife equity fund, a total investment of 114000 for a

total of 114 months at BSE 200 would have given a total return of Rs. 388701 whereas the

fund gave a total return of Rs. 669219, nearly double the return generated at BSE 200. And

now the cream of all the investments, Birla sunlife tax relief ’96. A total investment of Rs.

144000 for a period of 12 years at BSE 200 would have given total returns of just Rs. 553190

but the Birla sunlife tax relief ’96 gave an unbelievable total return of Rs 1684008.

Thus the above case very well explains the power of compounding and early investment. We

have seen how a meager amount of Rs. 144000 turned into Rs. 1684008. It may appear

unbelievable for many but SIPs have turned this into reality and the power of compounding is

speaking loud, attracting more and more investors to create wealth through SIPs.

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Does fund performance and ranking persist?

This project has been a great learning experience for me. But the analyses that are carried

onward these pages are really close to my heart. After taking a look at the data presented

below, an expert might underestimate my efforts. One might think it as a boring task and can

go for recording historic NAVs since last 1 month instead of recording it daily.

But frankly speaking, while tracking the NAVs, I really developed some sentiments with

these funds. Really the ups and downs in the NAVs affected me as if I m tracking my own

portfolio. The portfolio consists of different types of funds. We can see some funds are 5- star

rated but their performances are below the unrated funds. We can also find some funds which

performed very well initially but gradually declined either in short- run or long run. Some

funds have high NAVS but the returns offered are low. We can also see some funds

following same benchmark and reflecting diverse NAV and returns. Even it can be seen that

the expense ratios for various funds varies which may affect the ultimate return.

Now before going into details, lets have a look at those funds: in this downgrading equity

market, we can easily make out that the 1 year return of the fund that was on 17 th of april

could not be sustained till 1 month. One can sort out that the present return of funds has

decreased a lot and subsequently its NAV too has come down. All the funds are showing

negative returns for the last 1 month. Even the two hybrid funds are showing negative

monthly returns. That means all those who bought these funds a month back must be

experiencing a negative return. Although the annual return of the funds have gone down in

comparison to what it was offering a month back. Still the total return is positive. On an

average the equity funds are offering a return of 30% annually, inspite of a week equity

market.

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Now checking the validity of funds’ ratings, we can see that some of the funds are 5 star or 4

star rated but their returns lag behind the unrated funds. Although, since the ratings include

both risk and return so it will not be a total justice to judge the funds purely on a return basis

but still we can go for it just to judge them on the basis of returns generated.

Looking at the funds, we have three 5 star rated funds, one 4star rated and six unrated funds.

In other way, we have seven equity diversified funds, one equity specialty, one hybrid:

dynamic asset allocation and one hybrid: debt oriented fund. It is not possible to compare

each and every fund in details. So I have compared 2 funds out of this list on the basis of their

returns and expenses.

Here DBS Chola opportunities and ICICI Pru infrastructure follows the same benchmark

S&P CNX NIFTY. In this case, DBS Chola opportunities is a 4 star rated fund whereas ICICI

Pru infrastructure is an unrated fund. The star rating definitely gives DBS a competitive

advantage but now lets have a look at other factors, we can see that ICICI Pru has really

performed worse in the last month. Its 1 month return is -5.8% whereas DBS gave a return of

-3.07%. Even if we consider 6 months return or yearly returns, definitely DBS is a winner.

We can easily spot the difference by change in their rankings even. Considering 1 yr return,

we can spot DBS at no.5 whereas ICICI at no.6 but when we look at the monthly ratings, to

our ultimate shock, DBS is at 52 and ICICI far behind at 172. But if we look at the yearly

returns, then there is not much difference between them, DBS offering returns of 35.17%

whereas ICICI offering 34.27. But looking at the expenses, the expenses charged by ICICI is

lower to that of DBS, which may act as the ultimate factor in choosing the fund in a long run.

Thus at last we can conclude that ratings are totally irrelevant for investors. Here is

why they are totally irrelevant to investor:

1. Mutual fund ratings are based on the returns generated, that is, appreciation of net

asset value, based on the historical performance. So they rely more on the past, rather

than the current scenario.

2. As returns play a key role in deciding the ratings, any change in returns will lead to

re-rating of the mutual fund. If you choose your mutual fund only on the basis of

rating, it will be a nuisance to keep realigning your investment in line with the

revision of the ratings.

3. The ratings don’t value the investment processes followed by the mutual fund. As a

result, a fund following a certain process may lose out to a fund that has given

superior returns only because it has a star fund manager. But there is a higher risk

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associated with a star fund manager that the ratings don’t reflect. If the star fund

manager quits, it can throw the working of a mutual fund out of gear and thus affect

its performance.

4. The ratings don’t show the level of ethics followed by the fund. A fund or fund

manager that is involved in a scam or financial irregularities won’t get poor ratings on

the basis of ethics. As the star ratings look at just returns, any wrongdoing carried out

by the fund or fund manager will be completely ignored.

5. Ratings also don’t consider two very important factors: transparency and keeping

investors informed. There are no negative ratings awarded to the fund for being

investor-unfriendly.

6. Ratings don’t match the investor’s risk-appetite with their portfolio. As a matter of

fact, investments should be done only after considering the risk appetite of the

investor. For example, equities may not be the best investment vehicle for a very

conservative investor. However ratings fail to take that into account.

Ratings should be the starting point for making an investment decision. They are not the be

all and end all of mutual fund investments. There are other important factors like portfolio

management, age of funds and more, which should be taken into account before making an

investment.

Portfolio analysis tools:

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With the increasing number of mutual fund schemes, it becomes very difficult for an investor

to choose the type of funds for investment. By using some of the portfolio analysis tools, he

can become more equipped to make a well informed choice. There are many financial tools to

analyze mutual funds. Each has their unique strengths and limitations as well. Therefore, one

needs to use a combination of these tools to make a thorough analysis of the funds.

The present market has become very volatile and buoyant, so it is getting difficult for the

investors to take right investing decision. so the easiest available option for investors is to

choose the best performing funds in terms of “returns” which have yielded maximum returns.

But if we look deeply to it, we can find that the returns are important but it is also important

to look at the ‘quality’ of the returns. ‘Quality’ determines how much risk a fund is taking to

generate those returns. One can make a judgment on the quality of a fund from various ratios

such as standard deviation, sharpe ratio, beta, treynor measure, R-squared, alpha, portfolio

turnover ratio, total expense ratio etc.

Now I have compared two funds of SBI on the basis of standard deviation, beta, R-squared,

sharpe ratio, portfolio turnover ratio and total expense ratio. So before going into details, lets

have a look at these ratios:

Standard deviation:

in simple terms standard deviation is one of the commonly used statistical parameter to

measure risk, which determines the volatility of a fund. Deviation is defined as any variation

from a mean value (upward & downward). Since the markets are volatile, the returns

fluctuate everyday. High standard deviation of a fund implies high volatility and a low

standard deviation implies low volatility.

Beta analysis:

beta is used to measure the risk. It basically indicates the level of volatility associated with

the fund as compared to the market. In case of funds, as compared to the market. In case of

funds, beta would indicate the volatility against the benchmark index. It is used as a short

term decision making tool. A beta that is greater than 1 means that the fund is more volatile

74

than the benchmark index, while a beta of less than 1 means that the fund is more volatile

than the benchmark index. A fund with a beta very close to 1 means the fund’s performance

closely matches the index or benchmark.

The success of beta is heavily dependent on the correlation between correlation between a

fund and its benchmark. Thus, if the fund’s portfolio doesn’t have a relevant benchmark

index then a beta would be grossly inappropriate. For example if we are considering a

banking fund, we should look at the beta against a bank index.

R-Squared (R2):

R squared is the square of ‘R’ (i.e.; coefficient of correlation). It describes the level of

association between the fun’s market volatility and market risk. The value of R- squared

ranges from0 to1. A high R- squared (more than 0.80) indicates that beta can be used as a

reliable measure to analyze the performance of a fund. Beta should be ignored when the r-

squared is low as it indicates that the fund performance is affected by factors other than the

markets.

For example:

Case 1 Case 2

R2 0.65 0.88

B 1.2 0.9

In the above tableR2 is less than 0.80 in case 1, implies that it would be wrong to mention

that the fund is aggressive on account of high beta. In case 2, the r- squared is more than 0.85

and beta value is 0.9. it means that this fund is less aggressive than the market.

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Sharpe ratio: sharpe ratio is a risk to reward ratio, which helps in comparing the returns given

by a fund with the risk that the fund has taken. A fund with a higher sharpe ratio means that

these returns have been generated taking lesser risk. In other words, the fund is less volatile

and yet generating good returns. Thus, given similar returns, the fund with a higher sharpe

ratio offers a better avenue for investing. The ratio is calculated as:

Sharpe ratio = (Average return- risk free rate) / standard deviation

Portfolio turnover ratio: Portfolio turnover is a measure of a fund's trading activity and is

calculated by dividing the lesser of purchases or sales (excluding securities with maturities of

less than one year) by the average monthly net assets of the fund. Turnover is simply a

measure of the percentage of portfolio value that has been transacted, not an indication of the

percentage of a fund's holdings that have been changed. Portfolio turnover is the purchase

and sale of securities in a fund's portfolio. A ratio of 100%, then, means the fund has bought

and sold all its positions within the last year. Turnover is important when investing in any

mutual fund, since the amount of turnover affects the fees and costs within the mutual fund.

Total expenses ratio: A measure of the total costs associated with managing and operating

an investment fund such as a mutual fund. These costs consist primarily of management fees

and additional expenses such as trading fees, legal fees, auditor fees and other operational

expenses. The total cost of the fund is divided by the fund's total assets to arrive at a

percentage amount, which represents the TER:

Total expense ratio = (Total fund Costs/ Total fund Assets)

Performance report and portfolio analysis of magnum equity fund and magnum

multiplier plus against their benchmark BSE100:

YTD 1M 3M 6M 1Y 3Y 5YMagnum equity fund

-23.73% 9.02% -7.71% -15.18% 26.61% 45.07% 48.96%

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Magnum multiplier plus

-26.16% 5.57% -11.26% -18.00% 21.44% 45.28% 59.31%

BenchmarkBSE100

-17.53% 11.74% -2.56% 11.47% 30.71% 40.46% 44.24%

Now in the above table, we have two funds from SBI ie; magnum equity fund and magnum

multiplier plus following the same benchmark i.e; BSE 100. In this case, we have compared

their returns during various time periods. We have their returns YTD, during last 1 month,

3month, 6 months, 1 year, 3 year and 5 year. If we look at a long term perspective, then

magnum multiplier plus totally outperformed both magnum equity fund as well as bse 100. In

case of 5 year returns, neither the benchmark nor the magnum equity fund stands anywhere

near multiplier plus. It is greater than equity fund by 10.35% and from benchmark by

15.07%. but in case of 3 year returns, surely multiplier plus gave the maximum return but it

fell sharply in comparison to its 5 yr return. A 45.28% return scored over equity fund just by

a margin of 0.21% and benchmark by a mere 4.28%. now moving down to 1 yr return, we

can clearly see that bse 100 emerges as a true winner. The benchmark gave a return of

30.71% but both the funds failed to match it even.

But the ultimate surprise comes when we look at the datas of last 6 months. Here not only the

fund mangers failed to beat or match the market. Rather they also performed as laggards,

giving negative returns. When the bse 100 gave returns of 11.47%, these funds were trailing

by 29.47% and 26.65% which is a huge figure. In th last 3 months too, both the funds were

behind bse100 but all the three gave negative returns and the difference between them and

benchmark was narrowed down. Again, during last 1 month return of all three got positive

but the funds always remained behind the benchmark. The bse 100 outscored multiplier plus

and equity fund by 6.17% and 2.72% respectively. Similarly, the YTD return of all 3 is

negative even then the benchmark is at a better position than the funds.

From the following analysis we can infer that inspite of all the steps taken; it is not always

possible for the fund managers to always beat the market. Also, the past performance just

tells the background and history of the fund, by looking at it we cannot interpret that the fund

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will perform in the same way in the future too. The datas can be presented in the form of

a graph as follow:

Quantitative data:

Ratios Magnum equity fund Magnum multiplier plus

Standard deviation 26.00% 26.90%

Beta 0.96% 0.95%

r-squared

0.84%

Sharpe ratio 1.46% 1.42%

Portfolio turnover 31% 25%

Total expense ratio 2.5% 2.5%

Analysis:

We can see that the standard deviation of both the funds are more or less same

even then the S.D of multiplier plus is greater than that of equity fund by 0.90%.

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Generally higher the SD higher is the risk and vice-versa. Therefore, magnum

multiplier plus is riskier than magnum equity fund.

The beta of magnum equity fund is higher than that of magnum multiplier plus.

Therefore, equity fund is more volatile than multiplier plus. But beta of both the

funds is smaller than 1 that means both the funds are less volatile than the market

index. As r- squared values are more than 0.80 in both the cases, we can rely on the

usage of beta for the analysis of these funds.

A look at the Sharpe ratio indicates that magnum equity has outperformed multiplier

plus. A higher Sharpe ratio of equity fund depicts that these return have been

generated taking lesser risk than the multiplier plus. It Is less volatile than the other.

R-squared of both the funds are greater than 0.80. it indicates that beta can be used

as a reliable measure to analyze the performance of these funds. Magnum equity

fund’s R- squared is higher. So its beta is more reliable.

Portfolio turnover ratio of magnum equity fund is higher than multiplier plus. It

mean the manager is frequently churning the portfolio of equity fund than of

multiplier plus. It may lead to an increase in expenses but could be ignored if could

generate higher return by changing the composition of portfolio.

Total expense ratio of both the funds are same i.e.; 2.5%

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In the form of a chart:

80

Measuring Risks:

Risk Measure Implication Impact On Investor

High average maturity and

modified duration

More sensitive to interest

rate changes

Higher volatility in returns

Low average maturity and

modified duration

Less sensitive to interest

rate changes

Lower volatility in returns

Greater allocation to high

credit rated instruments

Low risk default Lower yield with lower risk

Greater allocation to low

rated instruments

Higher risk of default Higher yield but with

greater risk

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INVESTMENT STRATEGIES

1. Systematic Investment Plan: under this a fixed sum is invested each month

on a fixed date of a month. Payment is made through post dated cheques or

direct debit facilities. The investor gets fewer units when the NAV is high and

more units when the NAV is low. This is called as the benefit of Rupee Cost

Averaging (RCA)

2. Systematic Transfer Plan: under this an investor invest in debt oriented

fund and give instructions to transfer a fixed sum, at a fixed interval, to an

equity scheme of the same mutual fund.

3. Systematic Withdrawal Plan: if someone wishes to withdraw from a

mutual fund then he can withdraw a fixed amount each month.

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RISK V/S. RETURN:

83

Mutual Fund Companies in India

The concept of mutual funds in India dates back to the year 1963. The era between 1963 and 1987 marked the existance of only one mutual fund company in India with Rs. 67bn assets under management (AUM), by the end of its monopoly era, the Unit Trust of India (UTI). By the end of the 80s decade, few other mutual fund companies in India took their position in mutual fund market .The new entries of mutual fund companies in India were SBI Mutual Fund, Canbank Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund.The succeeding decade showed a new horizon in indian mutual fund industry. By the end of 1993, the total AUM of the industry was Rs. 470.04 bn. The private sector funds started penetrating the fund families. In the same year the first Mutual Fund Regulations came into existance with re-registering all mutual funds except UTI. The regulations were further given a revised shape in 1996.Kothari Pioneer was the first private sector mutual fund company in India which has now merged with Franklin Templeton. Just after ten years with private sector players penetration, the total assets rose up to Rs. 1218.05 bn. Today there are 33 mutual fund companies in India.

Major Mutual Fund Companies in India:-

ABN AMRO Mutual Fund:-

ABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO Trustee (India) Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO Asset Management (India) Ltd. was incorporated on November 4, 2003. Deutsche Bank A G is the custodian of ABN AMRO Mutual Fund.

Birla Sun Life Mutual Fund :-

Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life Financial. Sun Life Financial is a golbalorganisation evolved in 1871 and is being represented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart from India. Birla Sun Life Mutual Fund follows a conservative long-term approach to investment. Recently it crossed AUM of Rs. 10,000 crores.

Bank of Baroda Mutual Fund (BOB Mutual Fund):-

Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30, 1992 under the sponsorship of Bank of Baroda. BOB Asset Management Company Limited is the AMC of BOB Mutual Fund and was incorporated on November 5, 1992. Deutsche Bank AG is the custodian.

HDFC Mutual Fund:-

HDFC Mutual Fund was setup on June 30, 2000 with two sponsorersnemely Housing Development Finance Corporation Limited and Standard Life Investments Limited.

HSBC Mutual Fund:-

HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital Markets (India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual Fund acts as the Trustee Company of

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HSBC Mutual Fund..

ING Vysya Mutual Fund:-

ING Vysya Mutual Fund was setup on February 11, 1999 with the same named Trustee Company. It is a joint venture of Vysya and ING. The AMC, ING Investment Management (India) Pvt. Ltd. was incorporated on April 6, 1998.

Prudential ICICI Mutual Fund:-

The mutual fund of ICICI is a joint venture with Prudential Plc. of America, one of the largest life insurance companies in the US of A. Prudential ICICI Mutual Fund was setup on 13th of October, 1993 with two sponsorers, Prudential Plc. and ICICI Ltd. The Trustee Company formed is Prudential ICICI Trust Ltd. and the AMC is Prudential ICICI Asset Management Company Limited incorporated on 22nd of June, 1993.

Sahara Mutual Fund:-

Sahara Mutual Fund was set up on July 18, 1996 with Sahara India Financial Corporation Ltd. as the sponsor. Sahara Asset Management Company Private Limited incorporated on August 31, 1995 works as the AMC of Sahara Mutual Fund. The paid-up capital of the AMC stands at Rs 25.8 crore.

State Bank of India Mutual Fund:-

State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch offshor fund, the India Magnum Fund with a corpus of Rs. 225 cr. approximately. Today it is the largest Bank sponsored Mutual Fund in India. They have already launched 35 Schemes out of which 15 have already yielded handsome returns to investors. State Bank of India Mutual Fund has more than Rs. 5,500 Crores as AUM. Now it has an investor base of over 8 Lakhs spread over 18 schemes.

Tata Mutual Fund:-

Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsorers for Tata Mutual Fund are Tata Sons Ltd., and Tata Investment Corporation Ltd. The investment manager is Tata Asset Management Limited and its Tata Trustee Company Pvt. Limited. Tata Asset Management Limited's is one of the fastest in the country with more than Rs. 7,703 crores (as on April 30, 2005) of AUM.

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Kotak Mahindra Mutual Fund:-

Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. It is presently having more than 1,99,818 investors in its various schemes. KMAMC started its operations in December 1998. Kotak Mahindra Mutual Fund offers schemes catering to investors with varying risk - return profiles. It was the first company to launch dedicated gilt scheme investing only in government securities.

Unit Trust of India Mutual Fund:-

UTI Asset Management Company Private Limited, established in Jan 14, 2003, manages the UTI Mutual Fund with the support of UTI Trustee Company Privete Limited. UTI Asset Management Company presently manages a corpus of over Rs.20000 Crore. The sponsorers of UTI Mutual Fund are Bank of Baroda (BOB), Punjab National Bank (PNB), State Bank of India (SBI), and Life Insurance Corporation of India (LIC). The schemes of UTI Mutual Fund are Liquid Funds, Income Funds, Asset Management Funds, Index Funds, Equity Funds and Balance Funds.

Reliance Mutual Fund:-

Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882. The sponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co. Limited is the Trustee. It was registered on June 30, 1995 as Reliance Capital Mutual Fund which was changed on March 11, 2004. Reliance Mutual Fund was formed for launching of various schemes under which units are issued to the Public with a view to contribute to the capital market and to provide investors the opportunities to make investments in diversified securities.

Standard Chartered Mutual Fund:-

Standard Chartered Mutual Fund was set up on March 13, 2000 sponsored by Standard Chartered Bank. The Trustee is Standard Chartered Trustee Company Pvt. Ltd. Standard Chartered Asset Management Company Pvt. Ltd. is the AMC which was incorporated with SEBI on December 20,1999.

Franklin Templeton India Mutual Fund:-

The group, Frnaklin Templeton Investments is a California (USA) based company with a global AUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the largest financial services groups in the world. Investors can buy or sell the Mutual Fund through their financial advisor or through mail or through their website. They have Open end Diversified Equity schemes, Open end Sector Equity schemes, Open end Hybrid schemes, Open end Tax Saving schemes, Open end Income and Liquid schemes, Closed end Income schemes and Open end Fund of Funds schemes to offer.

Morgan Stanley Mutual Fund India:-

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Morgan Stanley is a worldwide financial services company and its leading in the market in securities, investmenty management and credit services. Morgan Stanley Investment Management (MISM) was established in the year 1975. It provides customized asset management services and products to governments, corporations, pension funds and non-profit organisations. Its services are also extended to high net worth individuals and retail investors. In India it is known as Morgan Stanley Investment Management Private Limited (MSIM India) and its AMC is Morgan Stanley Mutual Fund (MSMF). This is the first close end diversified equity scheme serving the needs of Indian retail investors focussing on a long-term capital appreciation.

Escorts Mutual Fund:-

Escorts Mutual Fund was setup on April 15, 1996 with Excorts Finance Limited as its sponsor. The Trustee Company is Escorts Investment Trust Limited. Its AMC was incorporated on December 1, 1995 with the name Escorts Asset Management Limited.

Alliance Capital Mutual Fund:-

Alliance Capital Mutual Fund was setup on December 30, 1994 with Alliance Capital Management Corp. of Delaware (USA) as sponsorer. The Trustee is ACAM Trust Company Pvt. Ltd. and AMC, the Alliance Capital Asset Management India (Pvt) Ltd. with the corporate office in Mumbai.

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Benchmark Mutual Fund:-

Benchmark Mutual Fund was setup on June 12, 2001 with Niche Financial Services Pvt. Ltd. as the sponsorer and Benchmark Trustee Company Pvt. Ltd. as the Trustee Company. Incorporated on October 16, 2000 and headquartered in Mumbai, Benchmark Asset Management Company Pvt. Ltd. is the AMC.

Canbank Mutual Fund:-

Canbank Mutual Fund was setup on December 19, 1987 with Canara Bank acting as the sponsor. Canbank Investment Management Services Ltd. incorporated on March 2, 1993 is the AMC. The Corporate Office of the AMC is in Mumbai.

Chola Mutual Fund:-

Chola Mutual Fund under the sponsorship of Cholamandalam Investment & Finance Company Ltd. was setup on January 3, 1997. Cholamandalam Trustee Co. Ltd. is the Trustee Company and AMC is Cholamandalam AMC Limited.

LIC Mutual Fund:-

Life Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. It contributed Rs. 2 Crores towards the corpus of the Fund. LIC Mutual Fund was constituted as a Trust in accordance with the provisions of the Indian Trust Act, 1882. . The Company started its business on 29th April 1994. The Trustees of LIC Mutual Fund have appointed JeevanBimaSahayog Asset Management Company Ltd as the Investment Managers for LIC Mutual Fund.

GIC Mutual Fund:-

GIC Mutual Fund, sponsored by General Insurance Corporation of India (GIC), a Government of India undertaking and the four Public Sector General Insurance Companies, viz. National Insurance Co. Ltd (NIC), The New India Assurance Co. Ltd. (NIA), The Oriental Insurance Co. Ltd (OIC) and United India Insurance Co. Ltd. (UII) and is constituted as a Trust in accordance with the provisions of the Indian Trusts Act, 1882.

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MUTUAL FUNDS—RISK ASSOCIATED

Investing in 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 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 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.

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

proportionately.

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Chapter VI

Conclusion

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CONCLUSION

Mutual funds are the best investment option for those seeking financial advice in making

investment decisions. It is also a best option for novice investors. Tailor made mutual funds

need to be developed to completely satisfy the investor requirements.The trick for converting

a person with no knowledge of mutual funds to a new Mutual Fund customer is to understand

which of the potential investors are more likely to buy mutual funds and to use the right

arguments in the sales process that customers will accept as important and relevant to their

decision.

As information and awareness is rising more and more people are enjoying the benefits of

investing in mutual funds. The main reason the number of retail mutual fund investors

remains small is that nine in ten people with incomes in India do not know that mutual funds

exist. But once people are aware of mutual fund investment opportunities, the number who

decide to invest in mutual funds increases to as many as one in five people

This Project gave me a great learning experience and at the same time it gave me enough

scope to implement my analytical ability. The analysis and advice presented in this Project

Report is based on market research on the saving and investment practices of the investors

and preferences of the investors for investment in Mutual Funds.

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BIBLIOGRAPHY

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BIBLIOGRAPHY

AUTHOR NAME TITLE OF THE BOOK EDITION/YEAR

1. PHILIP KOTLER MARKETING MANAGEMENT MILLENIUM EDITION2000

2. S.A. CHUNAWALLA

ESSENTIALS OF MARKETING RESEARCH 1995

3. D.D.SHARMA MARKETING RESEARCH MILLENIUM EDITION2000

4. JOHN.A.HASLEM MUTUAL FUNDS – RISK ANALYSIS FOR DECISIION MAKING

2003

WEBSITES

www.amfi.com

www.mutualfundsindia.com

www.utimf.com

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