Page | 1

OBJECTIVE

OBJECTIVES: Objectives of my project are: Page | 2 To examine whether mutual funds are really having a better prospect in India. To understand what investor want out of their investment in different schemes of mutual fund, how they compare it with traditional investment instrument, what is the number of increase in the investor base. To give a brief idea about the benefits available from Mutual Fund investment. To give an idea of the types of schemes available. To study some of the mutual fund schemes. To study some mutual fund companies and their funds. Explore the recent developments in the mutual funds in India. To give an idea about the regulations of mutual funds. To do the detail study of Mutual Funds.

OVERVIEW OF
Page | 3

INDIAN MUTUAL FUNDS INDUSTRY

MUTUAL FUNDS
Page | 4
ALL ABOUT MUTUAL FUNDS

WHAT IS MUTUAL FUND BY STRUCTURE BY NATURE EQUITY FUND DEBT FUNDS BY INVESTMENT OBJECTIVE OTHER SCHEMES PROS & CONS OF INVESTING IN MUTUAL FUNDS ADVANTAGES OF INVESTING MUTUAL FUNDS DISADVANTAGES OF INVESTING MUTUAL FUNDS MUTUAL FUNDS INDUSTRY IN INDIA MAJOR PLAYERS OF MUTUAL FUNDS IN INDIA HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY CATEGORIES OF MUTUAL FUNDS INVESTMENT STRATEGIES WORKING OF A MUTUAL FUND GUIDELINES OF THE SEBI FOR MUTUAL FUND COMPANIES DISTRIBUTION CHANNELS DOES FUND PERFORMANCE AND RANKING PERSIST? PORTFOLIO ANALYSIS TOOLS

Mutual Funds Industry in India

The origin of mutual fund industry in India is with the introduction of the concept of Page | 5 mutual fund by UTI in the year 1963. 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 improvements, both quality wise as well as quantity wise. Before, the monopoly of the market had seen an ending phase, the Assets Under Management (AUM) was Rs. 67bn. The private sector entry to the fund family rose the AUM to Rs. 470 in in March 1993 and till April 2004, it reached the height of 1,540 bn.

Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than the deposits of SBI alone, constitute less than 11% of the total deposits held by the Indian banking industry.

The main reason of its poor growth is that the mutual fund industry in India is new in the country. Large sections of Indian investors are yet to be intellectuated with the concept. Hence, it is the prime responsibility of all mutual fund companies, to market the product correctly abreast of selling.

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.

The major players in the Indian Mutual Fund Industry are:

Page | 6

Major Players of Mutual Funds In India

Period (Last&nbsp1 Week)

Rank

Scheme Name

Date

NAV (Rs.)

Last 1 Week 5.12

Since Inception -94.64

JM Core 11 Fund - Series 1 - Growth

Mar 26 , 2012

8.45

Tata Indo-Global Infrastructure Fund Growth

Mar 26 , 2012

8.26

5.05

-40.42

Tata Capital Builder Fund Growth

Mar 26 , 2012

12.44

5.03

15.35

Standard Chartered

Mar

14.07

20.92

Enterprise Equity Fund Growth

26 , 2012

Page | 7 5 DBS Chola Infrastructure Fund - Growth Mar 26 , 2012 9.01 4.65 -17.17

ICICI Prudential Fusion Fund - Series III Institutional - Growth

Mar 26 , 2012

10.2

4.62

23.69

DSP Merrill Lynch Micro Cap Fund - Regular Growth

Mar 26 , 2012

9.93

4.56

-0.85

ICICI Prudential Fusion Fund - Series III - Retail Growth

Mar 26 , 2012

10.19

4.51

22.39

DBS Chola Small Cap Fund - Growth

Mar 26 , 2008

6.36

3.75

-81.78

10

Principal Personal Taxsaver

Mar 25 , 2012

124.66

3.44

29.97

Page | 8

11

Benchmark Split Capital Fund - Plan A - Preferred Units

Mar 26 , 2012

141.51

3.14

13.71

12

ICICI Prudential FMP Series 33 - Plan A Growth

Mar 26 , 2012

9.89

2.91

-7.88

13

Tata SIP Fund - Series I Growth

Mar 26 , 2012

10.25

2.38

2.39

14

Sahara R.E.A.L Fund Growth

Mar 25 , 2012

7.64

1.86

-49.52

15

Tata SIP Fund - Series II Growth

Mar 26 , 2008

9.93

1.58

-0.94

A mutual fund is a professionally-managed firm of collective investments that pools Page | 9 money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities.in other words we can say that A Mutual Fund is a trust registered with the Securities and Exchange Board of India (SEBI), which pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. The value of each unit of the mutual fund, known as the net asset value (NAV), is mostly calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding. The value of all the securities in the portfolio in calculated daily. From this, all expenses are deducted and the resultant value divided by the number of units in the fund is the funds NAV.

NAV =

Total value of the fund. No. of shares currently issued and outstanding

Advantages of a MF
Page | 10 Mutual Funds provide the benefit of cheap access to expensive stocks Mutual funds diversify the risk of the investor by investing in a basket of assets A team of professional fund managers manages them with in-depth research inputs from investment analysts. Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate information, which individual investors cannot access.

10

History of the Indian mutual fund industry:

The mutual fund industry in India started in 1963 with the formation of Unit Trust of Page | 11 India, at the initiative of the Government of India and Reserve Bank. The history of mutual funds in India can be broadly divided into four distinct phases.

First Phase 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management.

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

1987 marked the entry of non- UTI, public sector 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 (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

11

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

1993 was the year in which the first Mutual Fund Regulations came into being, under Page | 12 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. 1,21,805 crores.

Fourth Phase since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes The 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.153108 crores under 421 schemes.

12

Categories of mutual funds

Page | 13

13

Mutual funds can be classified as follow:

Page | 14

Based on their structure:

Open-ended funds: Investors can buy and sell the units from the fund, at any point of time.

Close-ended funds: These funds raise money from investors only once. Therefore, after the offer period, fresh investments can not be made into the fund. If the fund is listed on a stocks exchange the units can be traded like stocks (E.g., Morgan Stanley Growth Fund). Recently, most of the New Fund Offers of close-ended funds provided liquidity window on a periodic basis such as monthly or weekly. Redemption of units can be made during specified intervals. Therefore, such funds have relatively low liquidity.

Based on their investment objective: Equity funds: These funds invest in equities and equity related instruments. With fluctuating share prices, such funds show volatile performance, even losses. However, short term fluctuations in the market, generally smoothens out in the long term, thereby offering higher returns at relatively lower volatility. At the same time, such funds can yield great capital appreciation as, historically, equities have outperformed all asset classes in the long term. Hence, investment in equity funds should be considered for a period of at least 3-5 years. It can be further classified as:

14

i) Index funds- In this case a key stock market index, like BSE Sensex or Nifty is tracked. Their individual stock Page | 15 ii) Equity diversified funds- 100% of the capital is invested in equities spreading across different sectors and stocks. portfolio mirrors the benchmark index both in terms of composition and weightages.

iii) Dividend yield funds- it is similar to the equity diversified funds except that they invest in companies offering high dividend yields.

iv) Thematic funds- Invest 100% of the assets in sectors which are related through some e.g. -An infrastructure fund invests in power, construction, cements sectors etc.

v) Sector funds- Invest 100% of the capital in a specific sector. e.g. - A banking sector fund will invest in banking stocks.

vi) ELSS- Equity Linked Saving Scheme provides tax benefit to the investors.

Balanced fund: Their investment portfolio includes both debt and equity. As a result,
on the risk-return ladder, they fall between equity and debt funds. Balanced funds are the ideal mutual funds vehicle for investors who prefer spreading their risk across various instruments. Following are balanced funds classes:

15

i) Debt-oriented funds -Investment below 65% in equities.

ii) Equity-oriented funds -Invest at least 65% in equities, remaining in debt. Page | 16

Debt fund: They invest only in debt instruments, and are a good option for investors

16

Working
Page | 17

Of Mutual Fund

17

Mutual Funds

Page | 18

Before we understand what is mutual fund, its very important to know the area in which mutual funds works, the basic understanding of stocks and bonds.

Stocks : Stocks represent shares of ownership in a public company. Examples of

public companies include Reliance, ONGC and Infosys. Stocks are considered to be the most common owned investment traded on the market.

Bonds : Bonds are basically the money which you lend to the government or a
company, and in return you can receive interest on your invested amount, which is back over predetermined amounts of time. Bonds are considered to be the most common lending investment traded on the market. There are many other types of investments other than stocks and bonds (including annuities, real estate, and precious metals), but the majority of mutual funds invest in stocks and/or bonds.

What Is Mutual Fund

A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the gathered money into specific securities (stocks or bonds). When you invest in a mutual

18

fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund.

Page | 19

Mutual funds are considered as one of the best available investments as compare to others they are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns.

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

19

Page | 20

20

Page | 21

21

Overview of existing schemes existed in mutual fund category

Page | 22 Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry

22

Type of Mutual Fund Schemes

BY STRUCTURE
Page | 23

Open Ended Schemes

An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.

Close Ended Schemes

A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor.

23

Interval Schemes
Interval Schemes are that scheme, which combines the features of open-ended Page | 24 and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.

BY NATURE

Under this the mutual fund is categorized on the basis of Investment Objective. By nature the mutual fund is categorized as follow:

24

Page | 25

25

1. Equity fund:

Page | 26

These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund managers outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows:

Diversified Equity Funds Mid-Cap Funds Sector Specific Funds Tax Savings Funds (ELSS)

Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.

2. Debt funds:
The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:

Gilt Funds: Invest their corpus in securities issued by Government, popularly

known as Government of India debt papers. These Funds carry zero Default risk

26

but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government.

Page | 27

Income Funds: Invest a major portion into various debt instruments such as
bonds, corporate debentures and Government securities.

MIPs: Invests maximum of their total corpus in debt instruments while they take
minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.

Short Term Plans (STPs): Meant for investment horizon for three to six
months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.

Liquid Funds: Also known as Money Market Schemes, These funds provides
easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.

27

Page | 28

3. Balanced funds: As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.

Further the mutual funds can be broadly classified on the basis of investment parameter viz, Each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the funds objective and invest accordingly.

28

BY INVESTMENT OBJECTIVE

Page | 29

Growth Schemes: Growth Schemes are also known as equity schemes. The
aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.

Income Schemes: Income Schemes are also known as debt schemes. The
aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.

Balanced Schemes: Balanced Schemes aim to provide both growth and

income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).

Money Market Schemes: Money Market Schemes aim to provide easy

liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.

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OTHER SCHEMES

Page | 30

Tax Saving Schemes: Tax-saving schemes offer tax rebates to the investors
under tax laws prescribed from time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.

Index Schemes: Index schemes attempt to replicate the performance of a

particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index.

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. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time.

30

Types of returns:

Page | 31

There are three ways, where the total returns provided by mutual funds can be enjoyed by investors:

Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it receives over the year to fund owners in the form of a distribution.

If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.

If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit. Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.

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Pros & cons of investing in mutual funds:

Page | 32 For investments in mutual fund, one must keep in mind about the Pros and cons of investments in mutual fund.

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Advantages of Investing Mutual Funds:

Page | 33 1. Professional Management - The basic advantage of funds is that, they are professional managed, by well qualified professional. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their investments.

2. Diversification - Purchasing units in a mutual fund instead of buying individual stocks or bonds, the investors risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others.

3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors. 4. Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and when they want. 5. Simplicity - Investments in mutual fund is considered to be easy, compare to other available instruments in the market, and the minimum investment is small. Most AMC also have automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50 per month basis.

33

Disadvantages of Investing Mutual Funds:

Page | 34 1. Professional Management- Some funds doesnt perform in neither the market, as their management is not dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or not the so-called professionals are any better than mutual fund or investor himself, for picking up stocks.

2. Costs The biggest source of AMC income, is generally from the entry & exit load which they charge from an investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.

3. Dilution - Because funds have small holdings across 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.

4. Taxes - when making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.

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Guidelines of the SEBI for Mutual Fund Companies :

Page | 35 To protect the interest of the investors, SEBI formulates policies and regulates the mutual funds. It notified regulations in 1993 (fully revised in 1996) and issues guidelinesfromtimetotime.

SEBI approved Asset Management Company (AMC) manages the funds by making investments in various types of securities. Custodian, registered with SEBI, holds the securities of various schemes of the fund in its custody.

According to SEBI Regulations, two thirds of the directors of Trustee Company or board of trustees must be independent. The Association of Mutual Funds in India (AMFI) reassures the investors in units of mutual funds that the mutual funds function within the strict regulatory framework. Its objective is to increase public awareness of the mutual fund industry. AMFI also is engaged in upgrading professional standards and in promoting best industry practices in diverse areas such as valuation, disclosure, transparency etc.

35

Documents required (PAN mandatory):

Page | 36 Proof of identity :

1. Photo PAN card

2. In case of non-photo PAN card in addition to copy of PAN card any one of the following: driving license/passport copy/ voter id/ bank photo pass book. Proof of address (any of the following ) :latest telephone bill, latest electricity bill, Passport, latest bank passbook/bank account statement, latest Demat account statement, voter id, driving license, ration card, rent agreement.

Offer document: An offer document is issued when the AMCs make New Fund
Offer(NFO). Its advisable to every investor to ask for the offer document and read it before investing. An offer document consists of the following: Standard Offer Document for Mutual Funds (SEBI Format) Summary Information Glossary of Defined Terms Risk Disclosures Legal and Regulatory Compliance

36

 Expenses Condensed Financial Information of Schemes Constitution of the Mutual Fund Page | 37 Investment Objectives and Policies Management of the Fund Offer Related Information.

Key Information Memorandum: a key information memorandum, popularly

known as KIM, is attached along with the mutual fund form. And thus every investor get to read it. Its contents are: 1 Name of the fund.

2. Iestment objective 3. Aset allocation pattern of the scheme. 4. Risk profile of the scheme 5. Plans & options 6. Minimum application amount/ no. of units 7. Benchmark index 8. Dividend policy 9. Name of the fund manager(s) 10 . Expenses of the scheme: load structure, recurring expenses 11. Performance of the scheme (scheme return v/s. benchmark return) 12. Year- wise return for the last 5 financial year.

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Distribution channels:
Page | 38 Mutual funds posses a very strong distribution channel so that the ultimate customers doesnt face any difficulty in the final procurement. The various parties involved in distribution of mutual funds are:

1. Direct marketing by the AMCs: the forms could be obtained from the AMCs directly. The investors can approach to the AMCs for the forms. some of the top AMCs of India are; Reliance ,Birla Sunlife, Tata, SBI magnum, Kotak Mahindra, HDFC, Sundaram, ICICI, Mirae Assets, Canara Robeco, Lotus India, LIC, UTI etc. whereas foreign AMCs include: Standard Chartered, Franklin Templeton, Fidelity, JP Morgan, HSBC, DSP Merill Lynch, etc.

2 .Broker/ sub broker arrangements: the AMCs can simultaneously go for broker/subbroker to popularize their funds. AMCs can enjoy the advantage of large network of these brokers and sub brokers.eg: SBI being the top financial intermediary of India has the greatest network. So the AMCs dealing through SBI has access to most of the investors.

3. Individual agents, Banks, NBFC:

investors can procure the funds through

individual agents, independent brokers, banks and several non- banking financial corporations too, whichever he finds convenient for him.

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Costs associated:
Page | 39

Expenses:
AMCs charge an annual fee, or expense ratio that covers administrative expenses, salaries, advertising expenses, brokerage fee, etc. A 1.5% expense ratio means the AMC charges Rs1.50 for every Rs100 in assets under management. A fund's expense ratio is typically to the size of the funds under management and not to the returns earned. Normally, the costs of running a fund grow slower than the growth in the fund size - so, the more assets in the fund, the lower should be its expense ratio

Loads:
Entry Load/Front-End Load (0-2.25%)- its the commission charged at the time of buying the fund to cover the cost of selling, processing etc.

Exit Load/Back- End Load (0.25-2.25%)- it is the commission or charged paid

when an investor exits from a mutual fund, it is imposed to discourage withdrawals. It may reduce to zero with increase in holding period.

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Page | 40

RESEARCH METHODOLOGY

40

Page | 41

RESEARCH METHODOLOGY

MAIN OBJECTIVE
To study the Awareness level in general public regarding Mutual funds.

SUB OBJECTIVES
To find out the purpose of investment. To study the general investment criteria of people. To find out time period for which an investor invests.

DATA COLLECTION METHOD

In this research, I have used Secondary Data. Secondary Data are the data collected for some purpose other than the problem at hand. I have collected secondary data from magazines, newspapers, periodicals and Internet. It is less reliable and secured data as compared to primary data.

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Page | 42

Measuring and evaluating mutual funds performance:

Every investor investing in the mutual funds is driven by the motto of either wealth creation or wealth increment or both. Therefore its very necessary to continuously evaluate the funds performance with the help of factsheets and news letters, websites, newspapers and professional advisors like SBI mutual fund services. If the investors ignore the evaluation of funds performance then he can loose hold of it any time. In this ever-changing industry, he can face any of the following problems:

1. Variation in the funds performance due to change in its management/ objective. 2. The funds performance can slip in comparison to similar funds. 3. There may be an increase in the various costs associated with the fund. 4 .Beta, a technical measure of the risk associated may also surge. 5. The funds ratings may go down in the various lists published by independent rating agencies. 6 .It can merge into another fund or could be acquired by another fund house.

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Page | 43

Performance measures:
Equity funds: the performance of equity funds can be measured on the basis of:
NAV Growth, Total Return; Total Return with Reinvestment at NAV, Annualized Returns and Distributions, Computing Total Return (Per Share Income and Expenses, Per Share Capital Changes, Ratios, Shares Outstanding), the Expense Ratio, Portfolio Turnover Rate, Fund Size, Transaction Costs, Cash Flow, Leverage.

Debt fund: likewise the performance of debt funds can be measured on the basis
of: Peer Group Comparisons, The Income Ratio, Industry Exposures and Concentrations, NPAs, besides NAV Growth, Total Return and Expense Ratio.

Liquid funds: the performance of the highly volatile liquid funds can be measured
on the basis of: Fund Yield, besides NAV Growth, Total Return and Expense Ratio.

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Page | 44

Concept of benchmarking for performance evaluation:

Every fund sets its benchmark according to its investment objective. The funds performance is measured in comparison with the benchmark. If the fund generates a greater return than the benchmark then it is said that the fund has outperformed benchmark , if it is equal to benchmark then the correlation between them is exactly 1. And if in case the return is lower than the benchmark then the fund is said to be underperformed.

Some of the benchmarks are :

1. Equity funds: market indices such as S&P CNX nifty, BSE100, BSE200, BSE-PSU, BSE 500 index, BSE bankex, and other sectoral indices. 2. Debt funds: Interest Rates on Alternative Investments as Benchmarks, I-Bex Total Return Index, JPM T-Bill Index Post-Tax Returns on Bank Deposits versus Debt Funds. 3. Liquid funds: Short Term Government Instruments Interest Rates as Benchmarks, JPM T-

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Bill Index

Page | 45

To measure the funds performance, the comparisons are usually done with: I)with a market index. ii) Funds from the same peer group. iii) Other similar products in which investors invest their funds.

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.

45

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 Page | 46 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

Convenie nce

Equity

High

Low

High

High

Moderate

Bonds

Moderate

High

Moderate

Moderate

High

Co.

Moderate

Moderate

Moderate

Low

Low

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Debenture s Co. FDs Page | 47 Moderate Low Low Low Moderate

Bank Deposits PPF

Low

High

Low

High

High

Moderate

High

Low

Moderate

High

Life Insurance Gold

Low

High

Low

Low

Moderate

Moderate

High

Moderate

Moderate

Gold

Real Estate Mutual Funds

High

Moderate

High

Low

Low

High

High

Moderate

High

High

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Page | 48

We can very well see that mutual funds outperform every other investment option. On three parameters it scores high whereas its 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 doesnt 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 its 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 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 doesnt gives a very bright picture. A lthough 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.

48

The reasons for this being:

I)Mutual funds combine the advantage of each of the investment products: Page | 49 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 eve rybody. 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

49

Rs. 500 through SIPs and even Rs. 100 in some cases.

Page | 50

How do investors choose between funds?

When the market is flooded with mutual funds, its 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 investors. 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

50

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 Page | 51 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 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

51

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 Page | 52 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 havent considered the tax factor then they may end loosing.

52

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 Page | 53 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.

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Page | 54

Most popular stocks among fund managers (as on 30th April 2012)

Company Name Reliance industries limited Larsen & toubro limited ICICI bank limited State bank of India Bharti airtel limited Bharat heavy electricals limited Reliance ventures ltd Infosys technologies ltd Oil& Natural gas corporation ltd. ITC ltd. communication

no. of funds 244 206 202 188 184 200

169 159 153 143

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Page | 55

no. of funds
300 250 200 150 100 50 0

no. of funds

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 dont 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

55

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 Page | 56 sectors. So we can have a look at most lucrative sectors to know about the recent . Sector name No. of MFs betting on it automotive banking services cement & construction consumer durables conglomerates chemicals consumer durables engineering & capital 317 goods food & beverages information technology media & entertainment Manufacturing metals& mining 175 284 218 259 275 237 51 218 259 non 146 & 255 financial 196

56

Miscellaneous oil & gas Pharmaceuticals Page | 57 Services Telecom Tobacco Utility

250 290 250 200 264 150 225

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, 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

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Page | 58

Axis Title 50 100 150 200 250 300 350 0 automotive banking & financial services cement & construction consumer durables conglomerates chemicals consumer non durables engineering & capital goods food & beverages information technology media & entertainment manufacturing metals& mining miscellaneous

presented in the form of a graph as follow:

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oil & gas
pharmaceuticals services telecom tobacco utility

Page | 59

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: Total Scheme Amount NAV NAV Date Amount

Reliance

diversified

power 1000 62.74 30/5/2008 14524.07

sector retail Reliance equity principal global opportunities fund DWS investment opportunities fund regular savings

1000

22.208

30/5/2008

13584.944

1000

18.86

30/5/2008

14247.728

1000

35.31

30/5/2008

13791.157

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BOB growth fund Page | 60

1000

42.14

30/5/2008

13769.152

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

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NO. OF Page | 61 INSTALMENT Scheme Name S Original inv Returns BSE 200 at FUND RETURNS

Birla SL tax relief '96

144

144000

553190

1684008

Birla SL equity fund Birla fund frontline equity

114

114000

388701

669219

66

66000

156269

181127

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Chart Title
1800000 1600000 1684008

Page | 62

1400000 1200000 1000000 800000 600000 400000 200000 0 Birla SL tax relief '96 144000 553190 669219 388701 114000 181127 156269 66000 Original inv Returns at BSE 200 FUND RETURNS

BIrla SL equity Birla frontline fund equity fund

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

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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.

Page | 63 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.

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

63

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 Page | 64 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 17th 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. Now checking the validity of funds ratings, we can see that some of the fu nds 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

64

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 Page | 65 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

65

basis of rating, it will be a nuisance to keep realigning your investment in line with the revision of the ratings. 3. The ratings dont value the investment processes followed by the mutual fund. Page | 66 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 associated with a star fund manager that the ratings dont 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 dont show the level of ethics followed by the fund. A fund or fund manager that is involved in a scam or financial irregularities wont 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 dont consider two very important factors: transparency and keeping investors informed. There are no negative ratings awarded to the fund.

6. Ratings dont match the investors 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.

66

Portfolio analysis tools:

Page | 67 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, Rsquared, sharpe ratio, portfolio turnover ratio and total expense ratio. So before going into details, lets have a look at these ratios:

67

Standard deviation:
Page | 68 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 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 funds 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 funds portfolio doesnt 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.

68

R-Squared (R2):
Page | 69 R squared is the square of R (i.e.; coefficient of correlation). It describes t he level of association between the funs 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 R2 B 0.65 1.2 Case 2 0.88 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. 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

69

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: Page | 70 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)

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Performance report and portfolio analysis of magnum equity fund

Page | 71

and magnum multiplier plus against their benchmark BSE100:

YTD Magnu m equity fund

1M

3M -7.71%

6M

1Y

3Y 45.07%

5Y 48.96%

-23.73% 9.02%

-15.18% 26.61%

Magnu m multipli er plus Bench mark BSE100

-26.16% 5.57%

-11.26% -18.00% 21.44%

45.28%

59.31%

-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

71

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 Page | 72 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.

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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 Page | 73 performance just tells the background and history of the fund, by looking at it we cannot interpret that the fund will perform in the same way in the future too. The datas can be presented in the form of a graph as follow:

70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% -10.00% -20.00% -30.00% -40.00% magnum equity magnum multiplier bse 100

73

Quantitative data: Ratios Page | 74 Standard deviation Beta r-squared Sharpe ratio Portfolio turnover Total expense ratio 1.46% 31% 2.5% 26.00% 0.96% 26.90% 0.95% 0.84% 1.42% 25% 2.5% Magnum equity fund Magnum multiplier plus

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%. 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

74

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 Page | 75 used as a reliable measure to analyze the performance of these funds. Magnum equity funds 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:

Page | 76

Chart Title
35.00%

30.00%

25.00%

Axis Title

20.00%

15.00%

10.00%

5.00%

0.00% equity fund multiplier plus

sd 26.00% 26.90%

beta 0.96% 0.95%

r-squared 0.93% 0.84%

sharpe 1.46% 1.42%

portfolio 31% 25%

expenses 2.50% 2.50%

76

Page | 77

CONCLUSION, FINDINGS & RECOMMENDATION

77

FINDINGS: Page | 78 Lack of knowledge is the main reason why people do not invest in mutual funds. Factors considered for investment is majorly growth and safety. Majority of the investors are preferred to invest for medium term only . Majority of mutual fund investors is not even aware of the name of the scheme in which they have invested. For investors, if mutual funds offer steady returns and minimization of risk, they may consider investing in them. Many investors do not prefer to take Professional Advice.

Increasing trend of portfolio management services It is found that major proportion of wealth management in India is PMS which

is basically for HNHs whose earnings are high.

After comparing the different investment options availiable with the investor it is

found that more risker an investment option is,more profitable it is.In case of Equities,they are more volatile than any other investment option but at the same giving high returns also.

78

CONCLUSION:
The most vital problem spotted is of ignorance. Investors should be made Page | 79 aware of the benefits. Nobody will invest until and unless he is fully convinced. Investors should be made to realize that ignorance is no longer bliss and what they are losing by not investing.

Factors considered for investment is majorly growth and safety. Majority of the investors are preferred to invest for medium term only . Lack of knowledge is the main reason why people do not invest in mutual funds. Majority of mutual fund investors is not even aware of the name of the scheme in which they have invested. For investors, if mutual funds offer steady returns and minimization of risk, they may consider investing in them. Many investors do not prefer to take Professional Advice. If one investor invests in one company he gains faith in it and he never want to switch to other.

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RECOMMENDATION
Mutual Fund Company needs to give the training of the Individual Financial Page | 80 Advisors about the Fund/Scheme and its objective, because they are the main source to influence the investors

Mutual funds offer a lot of benefit which no other single option could offer. But most of the people are not even aware of what actually a mutual fund is? They only see it as just another investment option. So the advisors should try to change their mindsets. The advisors should target for more and more young investors. Young investors as well as persons at the height of their career would like to go for advisors due to lack of expertise and time

Mutual Fund, the concept is widely known, but many people are still unaware about various schemes of mutual fund, increasing awareness is also very important thing.

There is a need to introduce very aggressive scheme which can give maximum returns to investor as they are more concern about return, transparency and regular income than risk and liquidity. Before making any investment Financial Advisors should first enquire about the risk tolerance of the investors/customers, their need and time (how long they want to invest). By considering these three things they can take .

80

BIBLIOGRAPHY
Page | 81

BOOKS
o Investment Analysis and Portfolio Management by Prasana Chandra o Indian financial system by H R Machiraju

o Security Analysis and Portfolio Management by Donald E. Fischer and Ronald J. Jordan sixth edition o Marketing Management by Philip Kotler 12th edition o Market Research by Paul N. Hague o Research Methodology by Ranjit Kumar o Research Methodology by Dr. CR Kothari

NEWS PAPERS o Economic Times o Business Standard o Financial Express

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