Table of Contents CONTENTS

List of Tables List of Figures 1. INTRODUCTION 1.1 OBJECTIVES OF STUDY 1.2NEED FOR THE STUDY 1.3SCOPE OF THE STUDY 1.4RESEARCH & METHODOLOGY 2. REVIEW OF LITERATURE 2.1 INTRODUCTION OF MUTUAL FUNDS 2.2 INDUSTRY PROFILE 2.3 HIATORY OF INDIAN MUTUAL FUNDS INDUSTRY 2.4 ORGANISATION OF A MUTUAL FUND 2.5 TYPES OF MUTUAL FUND SCHEMES 2.6 SWOT ANALYSIS OF MUTUAL FUNDS 2.7 RISK ASSOCIATED WITH MUTUAL FUND INVESTMENT 2.8 VALUATION OF MUTUAL FUND 2.9 VOLATILITY MEASUREMENT OF MUTUAL FUND 2.10 ARTICLES 3. THE COMPANY PROFILE 3.1 INTRODUCTION 3.2 MILESTONES 3.3 MISSION 3.4 OBJECTIVE 4. DATA ANALYSIS & INTERPRETATION 5. SUMMARY & CONCLUSIONS 5.1 FINDINGS 5.2 SUGGESTIONS 5.3 CONCLUSIONS 5.4 LIMITATIONS 6. BIBLIOGRAPHY 67 54 61 50 11

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CHAPTER 1 INTRODUCTION

INTRODUCTION TO MUTUAL FUND:

Mutual fund is a trust that pools money from a group of investors (sharing common financial goals) and invest the money thus collected into asset classes that match the stated investment objectives of the scheme. Since the stated investment objective of a mutual fund scheme generally forms the basis for an investor's decision to contribute money to the pool, a mutual fund can not deviate from its stated objectives at any point of time. Every Mutual Fund is managed by a fund manager, who using his investment management skills and necessary research works ensures much better return than what an investor can manage on his own. The capital appreciation and other incomes earned from these investments are passed on to the investors (also known as unit holders) in proportion of the number of units they own.

When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with the corpus

(the total amount of the fund). Mutual Fund investor is also known as a mutual fund shareholder or a unit holder. Any change in the value of the investments made into capital market instruments (such as shares, debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme is calculated by dividing the market value of scheme's assets by the total number of units issued to the investors. For example: If the market value of the assets of a fund is Rs. 100,000 The total number of units issued to the investors is equal to 10,000. Then the NAV of this scheme = (A)/(B), i.e. 100,000/10,000 or 10.00 Now if an investor 'X' owns 5 units of this scheme Then his total contribution to the fund is Rs. 50 (i.e. Number of units held multiplied by the NAV of the scheme) ADVANTAGES OF MUTUAL FUND 1. Portfolio Diversification: Mutual Funds invest in a well-diversified portfolio of securities which enables investor to hold a diversified investment portfolio (whether the amount of investment is big or small). 2. Professional Management: Fund manager undergoes through various research works and has better investment management skills which ensure higher returns to the investor than what he can manage on his own. 3. Less Risk: Investors acquire a diversified portfolio of securities even with a small investment in a Mutual Fund. The risk in a diversified portfolio is lesser than investing in merely 2 or 3 securities. 4. Low Transaction Costs: Due to the economies of scale (benefits of larger volumes), mutual funds pay lesser transaction costs. These benefits are passed on to the investors.

5. Liquidity: An investor may not be able to sell some of the shares held by him very easily and quickly, whereas units of a mutual fund are far more liquid. 6. Choice of Schemes: Mutual funds provide investors with various schemes with different investment objectives. Investors have the option of investing in a scheme having a correlation between its investment objectives and their own financial goals. These schemes further have different plans/options 7. Transparency: Funds provide investors with updated information pertaining to the markets and the schemes. All material facts are disclosed to investors as required by the regulator. 8. Flexibility: Investors also benefit from the convenience and flexibility offered by Mutual Funds. Investors can switch their holdings from a debt scheme to an equity scheme and vice-versa. Option of systematic (at regular intervals) investment and withdrawal is also offered to the investors in most open-end schemes. 9. Safety: Mutual Fund industry is part of a well-regulated investment environment where the interests of the investors are protected by the regulator. All funds are registered with SEBI and complete transparency is forced. DISADVANTAGES OF MUTUAL FUND 1. Costs Control Not in the Hands of an Investor: Investor has to pay investment management fees and fund distribution costs as a percentage of the value of his investments (as long as he holds the units), irrespective of the performance of the fund. 2. No Customized Portfolios: The portfolio of securities in which a fund invests is a decision taken by the fund manager. Investors have no right to interfere in the decision making process of a fund manager, which some investors find as a constraint in achieving their financial objectives. 3. Difficulty in Selecting a Suitable Fund Scheme: Many investors find it difficult to select one option from the plethora of funds/schemes/plans available. For this, they may have to take advice from financial planners in order to invest in the right fund to achieve their objectives.

TYPES OF MUTUAL FUNDS General Classification of Mutual Funds Open-end Funds / Closed-end Funds Open-end Funds: Funds that can sell and purchase units at any point in time are classified as Open-end Funds. The fund size (corpus) of an open-end fund is variable (keeps changing) because of continuous selling (to investors) and repurchases (from the investors) by the fund. An openend fund is not required to keep selling new units to the investors at all times but is required to always repurchase, when an investor wants to sell his units. The NAV of an open-end fund is calculated every day. Closed-end Funds: Funds that can sell a fixed number of units only during the New Fund Offer (NFO) period are known as Closed-end Funds. The corpus of a Closed-end Fund remains unchanged at all times. After the closure of the offer, buying and redemption of units by the investors directly from the Funds is not allowed. However, to protect the interests of the investors, SEBI provides investors with two avenues to liquidate their positions: Closed-end Funds are listed on the stock exchanges where investors can buy/sell units from/to each other. The trading is generally done at a discount to the NAV of the scheme. The NAV of a closed-end fund is computed on a weekly basis (updated every Thursday). Closed-end Funds may also offer "buy-back of units" to the unit holders. In this case, the corpus of the Fund and its outstanding units do get changed. Load Funds/no-load funds Load Funds: Mutual Funds incur various expenses on marketing, distribution, advertising, portfolio churning, fund managers salary etc. Many funds recover these expenses from the investors in

the form of load. These funds are known as Load Funds. A load fund may impose following types of loads on the investors:

Entry Load Also known as Front-end load, it refers to the load charged to an investor at the time of his entry into a scheme. Entry load is deducted from the investors contribution amount to the fund.

Exit Load Also known as Back-end load, these charges are imposed on an investor when he redeems his units (exits from the scheme). Exit load is deducted from the redemption proceeds to an outgoing investor.

Deferred Load Deferred load is charged to the scheme over a period of time. Contingent Deferred Sales Charge (CDSS) In some schemes, the percentage of exit load reduces as the investor stays longer with the fund. This type of load is known as Contingent Deferred Sales Charge. No-Load Fund: All those funds that do not charge any of the above mentioned loads are known as No-

load Funds. Tax-exempt Funds/ Non-Tax-exempt Funds Tax-exempt Funds: Funds that invest in securities free from tax are known as Tax-exempt Funds. All open-end equity oriented funds are exempt from distribution tax (tax for distributing income to investors). Long term capital gains and dividend income in the hands of investors are taxfree. Non-Tax-exempt Funds: Funds that invest in taxable securities are known as Non-Tax-exempt Funds. In India, all funds, except open-end equity oriented funds are liable to pay tax on distribution income. Profits arising out of sale of units by an investor within 12 months of purchase are categorized as short-term capital gains, which are taxable. Sale of units of an equity oriented fund is subject to Securities Transaction Tax (STT). STT is deducted from the redemption proceeds to an investor.

BROAD MUTUAL FUND TYPES

1. Equity Funds: Equity funds are considered to be the more risky funds as compared to other fund types, but they also provide higher returns than other funds. It is advisable that an investor looking to invest in an equity fund should invest for long term i.e. for 3 years or more. There are different types of equity funds each falling into different risk bracket. In the order of decreasing risk level, there are following types of equity funds: (1)Aggressive Growth Funds: In Aggressive Growth Funds, fund managers aspire for maximum capital appreciation and invest in less researched shares of speculative nature.

Because of these speculative investments Aggressive Growth Funds become more volatile and thus, are prone to higher risk than other equity funds.

Growth Funds: Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years) but they are different from Aggressive Growth Funds in the sense that they invest in companies that are expected to outperform the market in the future. Without entirely adopting speculative strategies, Growth Funds invest in those companies that are expected to post above average earnings in the future.

Speciality Funds: Speciality Funds have stated criteria for investments and their portfolio comprises of only those companies that meet their criteria. Criteria for some speciality funds could be to invest/not to invest in particular regions/companies. Speciality funds are concentrated and thus, are comparatively riskier than diversified funds. There are following types of speciality funds:

Sector Funds: Equity funds that invest in a particular sector/industry of the

market are known as Sector Funds. The exposure of these funds is limited to a particular sector (say Information Technology, Auto, Banking, Pharmaceuticals or Fast Moving Consumer Goods) which is why they are more risky than equity funds that invest in multiple sectors.

Foreign Securities Funds: Foreign Securities Equity Funds have the option to

invest in one or more foreign companies. Foreign securities funds achieve international diversification and hence they are less risky than sector funds. However, foreign securities funds are exposed to foreign exchange rate risk and country risk.

Mid-Cap or Small-Cap Funds: Funds that invest in companies having lower

market capitalization than large capitalization companies are called Mid-Cap or Small-Cap Funds. Market capitalization of Mid-Cap companies is less than that of big, blue chip companies (less than Rs. 2500 crores but more than Rs. 500 crores) and Small-Cap companies have market capitalization of less than Rs. 500 crores. Market Capitalization of a company can be calculated by multiplying the market price of the company's share by the total number of its outstanding shares in the market. The shares of Mid-Cap or Small-Cap Companies are not as liquid as of

Large-Cap Companies which gives rise to volatility in share prices of these companies and consequently, investment gets risky.

Diversified Equity Funds: Except for a small portion of investment in liquid

money market, diversified equity funds invest mainly in equities without any concentration on a particular sector(s). These funds are well diversified and reduce sector-specific or company-specific risk. However, like all other funds diversified equity funds too are exposed to equity market risk. One prominent type of diversified equity fund in India is Equity Linked Savings Schemes (ELSS). As per the mandate, a minimum of 90% of investments by ELSS should be in equities at all times. ELSS investors are eligible to claim deduction from taxable income (up to Rs 1 lakh) at the time of filing the income tax return. ELSS usually has a lock-in period and in case of any redemption by the investor before the expiry of the lockin period makes him liable to pay income tax on such income(s) for which he may have received any tax exemption(s) in the past.

Equity Index Funds: Equity Index Funds have the objective to match the performance of a specific stock market index. The portfolio of these funds comprises of the same companies that form the index and is constituted in the same proportion as the index. Equity index funds that follow broad indices (like S&P CNX Nifty, Sensex) are

Less risky than equity index funds that follow narrow sectoral indices (like BSEBANKEX or CNX Bank Index etc). Narrow indices are less diversified and therefore, are more risky.

2.Debt/Income Funds: Funds that invest in medium to long-term debt instruments issued by private companies, banks, financial institutions, governments and other entities belonging to various sectors (like infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are low risk profile funds that seek to generate fixed current income (and not capital appreciation) to investors. In order to ensure regular income to investors, debt (or income) funds distribute large fraction of their surplus to investors. Although debt securities are generally less risky than equities, they are subject to credit risk (risk of default) by the issuer at the time of interest

or principal payment. To minimize the risk of default, debt funds usually invest in securities from issuers who are rated by credit rating agencies and are considered to be of "Investment Grade". Debt funds that target high returns are more risky. Based on different investment objectives, there can be following types of debt funds:

Diversified Debt Funds: Debt funds that invest in all securities issued by entities belonging to all sectors of the market are known as diversified debt funds. The best feature of diversified debt funds is that investments are properly diversified into all sectors which results in risk reduction. Any loss incurred, on account of default by a debt issuer, is shared by all investors which further reduces risk for an individual investor.

Focused Debt Funds: Unlike diversified debt funds, focused debt funds are narrow focus funds that are confined to investments in selective debt securities, issued by companies of a specific sector or industry or origin. Some examples of focused debt funds are sector, specialized and offshore debt funds, funds that invest only in Tax Free Infrastructure or Municipal Bonds. Because of their narrow orientation, focused debt funds are more risky as compared to diversified debt funds. Although not yet available in India, these funds are conceivable and may be offered to investors very soon.

Assured Return Funds:

Although it is not necessary that a fund will meet its

objectives or provide assured returns to investors, but there can be funds that come with a lock-in period and offer assurance of annual returns to investors during the lock-in period. Any shortfall in returns is suffered by the sponsors or the Asset Management Companies (AMCs). These funds are generally debt funds and provide investors with a low-risk investment opportunity. However, the security of investments depends upon the net worth of the guarantor (whose name is specified in advance on the offer document). To safeguard the interests of investors, SEBI permits only those funds to offer assured return schemes whose sponsors have adequate net-worth to guarantee returns in the future. In the past, UTI had offered assured return schemes (i.e. Monthly Income Plans of UTI) that assured specified returns to investors in the future. UTI was not able to fulfill its promises and faced large shortfalls in returns. Eventually, government had to intervene and took over UTI's payment obligations on itself. Currently, no AMC in India offers assured return schemes to investors, though possible.

Fixed Term Plan Series: Fixed Term Plan Series usually are closed-end schemes having short term maturity period (of less than one year) that offer a series of plans and

issue units to investors at regular intervals. Unlike closed-end funds, fixed term plans are not listed on the exchanges. Fixed term plan series usually invest in debt / income schemes and target short-term investors. The objective of fixed term plan schemes is to

Gratify investors by generating some expected returns in a short period. 1.Open-end 2.Closed-end 3.GiltFunds Also known as Government Securities in India, Gilt Funds invest in government papers (named dated securities) having medium to long term maturity period. Issued by the Government of India, these investments have little credit risk (risk of default) and provide safety of principal to the investors. However, like all debt funds, gilt funds too are exposed to interest rate risk. Interest rates and prices of debt securities are inversely related and any change in the interest rates results in a change in the NAV of debt/gilt funds in an opposite direction.

4. Money Market/Liquid Funds: Money market / liquid funds invest in short-term (maturing within one year) interest bearing debt instruments. These securities are highly liquid and provide safety of investment, thus making money market / liquid funds the safest investment option when compared with other mutual fund types. However, even money market / liquid funds are exposed to the interest rate risk. The typical investment options for liquid funds include Treasury Bills (issued by governments), Commercial papers (issued by companies) and Certificates of Deposit (issued by banks). 5. Hybrid Funds: As the name suggests, hybrid funds are those funds whose portfolio includes a blend of equities, debts and money market securities. Hybrid funds have an equal proportion of debt and equity in their portfolio. There are following types of hybrid funds in India:

Balanced Funds The portfolio of balanced funds include assets like debt securities, convertible securities, and equity and preference shares held in a relatively equal proportion. The objectives of balanced funds are to reward investors with a regular

income, moderate capital appreciation and at the same time minimizing the risk of capital erosion. Balanced funds are appropriate for conservative investors having a long term investment horizon.

Growth-and-Income Funds Funds that combine features of growth funds and income funds are known as Growth-and-Income Funds. These funds invest in companies having potential for capital appreciation and those known for issuing high dividends. The level of risks involved in these funds is lower than growth funds and higher than income funds.

6. Commodity Funds: Those funds that focus on investing in different commodities (like metals, food grains, crude oil etc.) or commodity companies or commodity futures contracts are termed as Commodity Funds. A commodity fund that invests in a single commodity or a group of commodities is a specialized commodity fund and a commodity fund that invests in all available commodities is a diversified commodity fund and bears less risk than a specialized commodity fund. Precious Metals Fund and Gold Funds (that invest in gold, gold futures or shares of gold mines) are common examples of commodity funds. 7. Real Estate Funds: Funds that invest directly in real estate or lend to real estate developers or invest in shares/securitized assets of housing finance companies, are known as Specialized Real Estate Funds. The objective of these funds may be to generate regular income for investors or capital appreciation. 8. Exchange Traded Funds (ETF): Exchange Traded Funds provide investors with combined benefits of a closed-end and an open-end mutual fund. Exchange Traded Funds follow stock market indices and are traded on stock exchanges like a single stock at index linked prices. The biggest advantage offered by these funds is that they offer diversification, flexibility of holding a single share (tradable at index linked prices) at the same time. Recently introduced in India, these funds are quite popular abroad. 9. Fund of Funds:

Mutual funds that do not invest in financial or physical assets, but do invest in other mutual fund schemes offered by different AMCs, are known as Fund of Funds. Fund of Funds maintain a portfolio comprising of units of other mutual fund schemes, just like conventional mutual funds maintain a portfolio comprising of equity/debt/money market instruments or non financial assets. Fund of Funds provide investors with an added advantage of diversifying into different mutual fund schemes with even a small amount of investment, which further helps in diversification of risks. However, the expenses of Fund of Funds are quite high on account of compounding expenses of investments into different mutual fund schemes. Risk Hierarchy of Different Mutual Funds: Thus, different mutual fund schemes are

exposed to different levels of risk and investors should know the level of risks associated with these schemes before investing. The graphical representation hereunder provides a clearer picture of the relationship between mutual funds and levels of risk associated with these funds:

MUTUAL FUND STRUCTURE

As you probably know, mutual funds have become extremely popular over the last 20 years. What was once just another obscure financial instrument is now a part of our daily lives. More than 80 million people, or one half of the households in America, invest in mutual

funds. That means that, in the United States alone, trillions of dollars are invested in mutual funds. In fact, too many people, investing means buying mutual funds. After all, its common knowledge that investing in mutual funds is (or at least should be) better than simply letting your cash waste away in a savings account, but, for most people, that's where the understanding of funds ends. It doesn't help that mutual fund salespeople speak a strange language that is interspersed with jargon that many investors don't understand. Originally, mutual funds were heralded as a way for the little guy to get a piece of the market. Instead of spending all your free time buried in the financial pages of the Wall Street Journal, all you had to do was buy a mutual fund and you'd be set on your way to financial freedom. As you might have guessed, it's not that easy. Mutual funds are an excellent idea in theory, but, in reality, they haven't always delivered. Not all mutual funds are created equal, and investing in mutuals isn't as easy as throwing your money at the first salesperson who solicits your business. In this tutorial, we'll explain the basics of mutual funds and hopefully clear up some of the myths around them. You can then decide whether or not they are right for you.

1.1 OBJECTIVES OF STUDY

1. To study about growth of mutual fund companies in India.

2. To provide opportunity for the lower income groups to acquire return without difficulty in the form of mutual funds through calculating risk &return. 3. Mutual fund has an investment objective a goal or financial results in wants to realized 4. Most fund objectives fit in to one of several broad categories such as growth in value current in come.

1.2 NEED FOR THE STUDY

The study basically made to educate in investors about mutual funds. Analyze The various schemes and to highlight the risk and return of diversity of investment that mutual funds offer. Thus, through the study one would understand how a common man could fruitfully convert a pittance into great penny by wisely investing into the right scheme according to his risk taking abilities.

In Emerging Markets like India, where the economy is bubbling with a growth rate of the 9.3% in the last quarter, the need of the economic drive investments is necessary. Mutual fund gain a special recognition of investment, where the invested amount in the equity related products is directly invested in the industry.

Study comprises of the ease of investment in the equity products, and the various benefits the customer enjoys of investment

1.3 SCOPE OF THE STUDY

The scope of the project includes acquiring knowledge about the Mutual Fund Industry. As a whole it included the detailed study of mutual funds, its benefits, various types of Mutual Fund schemes, investors preferred investment avenues, their awareness towards the Products, etc.

It provided an opportunity to know about the financial planning process and recommending the financial strategies to the investors. It enabled to create awareness among the investors about the right investment products, helping them to understand about the various investment schemes and selecting the right amount of fund for investment purpose.

The study also helped me to put the learning into practice and to get a feel of the market by interacting with the prospective investors.

1.4 RESEARCH & METHODOLOGY

The study regarding the growth of mutual funds in India is done is one of hot topics in the present global scenario. The main theme behind selecting this topic is to help an average investor in maping up his savings in different investment avenues, in which he can get handsome returns Primary data: Data collected at time of the live project experiences and information collected at time of the project training classes. Secondary data: Secondary data collected through analyzing the company literature, top rated Mutual fund business magazines, facts sheets, and internet. Web related information played a major role in the collection of data.

1.5 LIMITATIONS

1. The main limitation of mutual funds is that it takes time to invest money. 2. Unfortunately most mutual funds receive negative returns when markets are in bane phase and investors are not willing to try out mutual funds .Since it is difficult it invest all funds in one day there is some money waiting to be invested. Further, there may be a time lag before investment opportunities are identified. 3. Mutual funds although regulated by the government are not insured against losses. The federal deposit insurance corporation only insures against certain losses at banks, credit unions, savings and loans but not mutual funds. 4. The other limitations of a mutual funds is the trading limitations , where the funds are highly liquid in general most mutual funds (called open ended funds) cannot be bought or sold in the middle trading day.

CHAPTER 2
LITERATURE REVIEW

2.1 INTRODUCTION OF MUTUAL FUNDS

A 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 invested by the Fund manager in different types of securities depending upon the objectives of the scheme. These could range from equity and debt in money market instruments. The income earned through these investments at a capital appreciation realized by the scheme is shared by its unit holders in proportion to the number of units owned by them. Thus a mutual fund is a most suitable investment for a common man has as its offers an opportunity to invest in a diversified, professional managed portfolio at a relatively low cost. Any body with in investment able surplus of as little as a few thousand rupees can invest in mutual fund. Each mutual fund scheme has a define investment object and strategy.

A mutual fund is the ideal investment vehicle for todays complex and modern financial scenario market for equity shares, bonds and other fixed income instrument, real estate, derivatives and other assets have become mature and information driven. Prices changes in these assets are driven by global events occurring faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implication and act speedily, an individual also finds it difficult to keep track of ownership of his assets, investment, brokerage dues and bank transaction etc.

A mutual fund is the answer to all these situations. It appoints professionally qualified and experienced staff that manages each of these functions on a full time basis. The large pool of money collected in the Mutual Fund vehicle exploits economies of scale in all three areasresearch, investments and transaction processing.

Mutual Fund Operation Flow Chart

2.2 INDUSTRY PROFILE

MUTUAL FUNDS
In Mutual Fund Book, published by Investment company of U.S.., A Mutual Fund is a financial service organization that receives money from shareholders, invest it, earns returns on it, attempts to make it grows and aggress to pay the share holders cash on demand for the current value of his investment. The investment managers of the funds manage these savings in such a way that the risk is minimized and steady return is ensured. Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 define Mutual Fund as , 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 instrument. Until 1987, the Unit Trust of India was the sole mutual fund in the country. The subsidiaries of the four public sector banks launched mutual funds, namely, SBI Mutual Fund, Canbank Mutual Fund, BOI Mutual Fund, PNB Mutual Fund and Indian bank Mutual Fund. Later, the LIC and the GIC launched the LIC Mutual Fund and the GIC Mutual Fund respectively. In the post-1992 period, other public financial institutions such as ICICI and private sector sponsored MFs were on the scene. Some of the important private sector sponsors of MFs are Industrial Investment Trust, Credit Capital Finance Corporation, Apple Industries, Birla Global Finance, 20Th century finance CRB Capital markets, Tata Mutual Fund, Sriram Mutual Fund and a foreign institutional investor, namely Morgan Stanley and so on. The Industrial Development Bank of India (IDBI) had entered MF sector in 1995.

Funds are selected on quantitative parameters like volatility, FAMA Model, risk adjusted returns, and rolling return coupled with a qualitative analysis of fund performance and investment styles through regular interactions / due diligence processes with fund managers.

2.3 HISTORY OF INDIAN MUTUAL FUNDS 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 of India. The History of Mutual Fund can be broadly divided into four distinct phases.

1. First Phase

: 1964-1987

2. Second Phase : 1987-1993 3. Third Phase : 1993-2003

4. Fourth Phase : Since FEB 2003

First Phase 1964-87

Unit Trust of India (UTI) was established on 1963 by an act of parliament. It was set up by 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 (US-64). At the end of 1988 UTI had Rs 6700 Crores of Assets Under Management (AUM).

Second Phase 1987-93 (Entry of Public sector Funds) In 1987 market, the entry of non-UTI public sector Mutual Funds set up by public sector banks and Life Insurance Corporation of India (LIC), SBI Mutual Fund was the first non-UTI Mutual Fund established in June 1987 fallowed by Canara Bank Mutual Fund (Dec 87), Punjab National Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 92), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its Mutual Fund in June 1989 while LIC had set up its Mutual Fund in Dec 90. Third Phase 1993-2003 (Entry of private sector Funds) With the entry of private sector funds in1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also 1993 was the year in which the first mutual fund Regulations came into being under which all mutual funds except UTI were to be register and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual funds register in July 1993. The 1993 SEBI (mutual funds) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now Functions under the SEBI Regulations 1996.

Fourth Phase-since February 2003 This Phase had bitter experience for UTI. It was segmented into two separate entities. One is the specified undertaking of the Unit Trust of India with AUM of Rs. 29, 835 crores (as on January 2003). The specified undertaking of Unit Trust of India, functioning under an

administrator and under the rules framed by Government of India and doesnt come under the preview of the Mutual Fund Regulations. 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 Funds Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs. 76,000 crores of AUM and with the setting up a UTI Mutual Funds, confirming to the SEBI Mutual Funds Regulations, and with recent mergers taking place among different private sector funds, the mutual funds industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds which manage assets of Rs. 1, 53, 108 crores under 421 schemes.

GROWTH IN ASSETS UNDER MANAGEMENT

Note:
Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India effective from February 2003. The Assets under management of the Specified Undertaking of the Unit Trust of India has therefore been excluded from the total assets of the industry as a whole from February 2003 onwards.

2.4 ORGANISATION OF A MUTUAL FUND Mutual Fund Structure:

Structure of mutual fund in India is governed by the SEBI Regulations 1996. These regulations make it mandatory for mutual fund to have three tier structure of SPONSOR TRUSTEE-ASSET MANSGEMENT COMPANY (AMC). The SPONSOR is the promoter of the mutual fund, and appoints the trustees. The TRUSTEES are the mutual fund and appoint the AMC for managing the Investment Portfolio. The AMC is the business face of the mutual fund as it manages all the affairs of the mutual fund. The mutual fund and the AMC have to be registered with SEBI. SEBI regulations also provide for who can be sponsor, trustee and AMC and specify the formal of agreements between these entities. The agreements provide for the rights, duties and obligations of these entities.

Sponsor
Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund, sponsor must contribute at least 40% of the net worth of the Investment Managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Fund) Regulation, 1996. The sponsor is not responsible or liable for any loss or shortfall resulting from the operations of the schemes beyond the initial contribution made by it towards setting up of the mutual fund.

Trust
The Mutual Fund is constituted as trust accordance with the provision of the Indian Trust Act, 1882 by the sponsor. The trust deed is registered under the Indian Regulation Act, 1908.

Trustee
Trustee is usually a company or a Board of trustee. The main responsibility of the trustee is to safeguard the interest of the unit holder and inter alia ensure that the AMC functions in interest of investors and in accordance with the Securities and Exchange Board of India (Mutual Fund0 Regulations, 1996, the provisions of the trust Deed and the offer Documents of the respective schemes. At least 2/3rd directions of the Trustee are independent directors who are not associated with the sponsor in any manner.

Rights of the trustees:

1. Trustee appoints AMC on consultation with sponsor and with SEBI regulations. 2. The entire Mutual Fund scheme floated by the AMC is to be approved by the trustee. 3. Trustee can seek information on operations from AMC. 4. Trustees can seek remedial actions from AMC in extreme situation of dissatisfaction with performance.

Obligations of the Trustees:

1. Trustees must ensure that the transactions must be in accordance with the trust deed. 2. Trustees must ensure that the AMC has system and procedures in place. 3. Trustees must ensure due diligence on the part of AMC in appointment of constituents and business associates. 4. Trustee must furnish a report of activities to SEBI on half yearly basis. 5. Trustees must ensure that activities of mutual fund are in compliance with SEBI.

Duties of the Trustees:

1. Appointment of AMC and its directors. 2. Observance of AMC functioning. 3. Protection of trust property. 4. Ensuring that all constituent and associates are register under entities. 5. Review the service of contract and terms. 6. Reporting to SEBI any development in the mutual fund.

7. Appointment of independent auditors and review of periodical reports. 8. Periodic compliance reports from AMC. 9. Communicate deficiencies and recommendations in writing to the AMC. 10. Prescribe a code for the trustee and the personnel of the AMC.

Asset Management Company (AMC)

The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the mutual fund. At least 50% of the directors of the AMC are independent directors who are not associated with the sponsor in any manner. The AMC must have a net worth of at least 10 corers at all times.

Types of AMCs in Indian context

1. AMCs owned by banks. 2. AMCs owned bi financial institution. 3. AMCs owned by India private sector companies. 4. AMCs owned by foreign institutional investors. 5. AMCs owned by Indian & foreign sponsor

Partners: Register and Transfer agent

The AMC if so authorized by the Trust Deed appoints the Register and Transfer Agent to the Mutual Fund. The register processes the application form, redemption request and dispatch accounts statements to the unit holder. The Register and Transfer agents also handle communications with investors and updates investor records.

Brokers
One who sells financial products whether in insurance, real estate, stocks or mutual fund. Brokers are registered members of stock exchange. They charge commission for their services. Brokers support the Investment Management function of the mutual fund by enabling the investment manager to buy and sell securities. Brokers also provide investment manager with research report on the performance of various companies and industrial sector. They are important source of information to fund managers.

Custodians

Custodians as a financial term, refers to (Custodian Bank), agent or other organization responsible for safeguarding a firms or individuals financial assets. Custodians are responsible for the securities held in the mutual funds portfolio.

Depository participant (DP)

DPs hold securities of mutual funds in dematerialized form. The depository participant through whom the demat accounts are operated acts as an agent of the depository. The National Securities Depository Ltd (NSDL) and Central Depository Ltd are the two recognized depositories in India. Corporation Bank has started the depository services in association with NSDL who is the major player in the market. The depository through the Depository participants is offering the following services to their clients. 1. Opening of accounts 2. De-materialization 3. Re-materialization 4. Settlement of transaction 5. Pledge and hypothecation 6. Stock lending and barrowing

Benefits

1. Immediate transfer of securities 2. No stamps duty on transfer of securities 3. Elimination of risks associated with loss, forged transfer, bad delivery, fake certificates 4. Reduction in paperwork involved in transfer of securities 5. Reduction in transaction cost 6. nomination facilities 7. Easy and fast recording of change of address and avoids multiple correspondence

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

Securities and exchange board of India was set up in 1988 and given the saturation status in January in 1992 for healthy regulation of the capital markets. The controllers of capital issue (CCI) were abolished and companies have to approach market directly, subject to SEBI guidelines relating to disclosures and other measures of investors protection.SSS

FUNCTIONS OF SEBI
1.

To regulate the business and stock exchanges.

2.

To register and regulate intermediaries associated with securities market as well as working of mutual funds.

3. 4.

Promote and regulate self regulating organization. Prohibit fraudulent and unfair trade practices relating to securities transactions.

2.5 TYPES OF MUTUAL FUND SCHEMES

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.

BY STRUCTURE:

Open - ended Schemes

In India majority of mutual funds are open-ended. Fund that float open-ended schemes, can sell as many units as investors demand. These do not have a fixed maturity period. Investors can buy or sell units at NAV-related prices from and to the mutual fund on any business day. Most people prefer open-ended mutual funds because they offer liquidity. Such funds can issue and redeem units any time during the life of a scheme. Hence, unit capital of open-ended funds can fluctuate on a daily basis.

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. Interval Schemes Interval Schemes combine the features of open-ended and close-ended schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices.

BY INVESTMENT OBJECTIVE:

Growth Schemes
These schemes typically emphasize capital appreciations, with generation of current income being a secondary concern. There were 55 growth schemes launched by Indian Mutual funds as of 31st march 1996. Under these schemes there is no guarantee or assurance of returns. The funds seek to achieve max capital appreciation and invest around 80% in equities. Growth schemes are usually close ended and listed in tock exchanges. By the end of mar 1995, 55 growth schemes had mobilized 18.4% of the total funds Example: UTI Master shares.

Income Schemes
This scheme can be Open ended or Close ended. These schemes provide a fairly predictable stream of income over a period of time, consistent with preservation of capital value. The investments are in avenues like debentures of private sector companies, public sector bonds, and government securities. In order to obtain regular flow of income, these funds invest around 70-80% assets in income generating securities, such as debentures and bonds. Prior to 1993 all the mutual funds floated monthly or yearly schemes with assured returns. This was subsequently prohibited in 1993-94, but allowed in 1995. The 1996 regulations allowed mutual funds to launch guaranteed schemes subject to fulfillment of certain conditions. The Income schemes are the most popular types in India, the important variants in income schemes available in India are.

1. 2. 3. 4.

Open end regular income schemes Open end cumulative schemes Open end recurring investment schemes Closed end regular income schemes

5. 6.

Closed end deferred income schemes Closed end multi option schemes

Balanced Schemes
The aim of balanced funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls. These are ideal for investors looking for a combination of income and moderate growth. Example: GIC Balanced Fund Scheme

Money Market Schemes

The aim of money market funds is 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. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for Corporate and individual investors as a means to park their surplus funds for short periods

OTHER SCHEMES
Tax Saving Schemes

All the mutual funds floated by public sector banks and insurance companies have launched tax saving schemes these schemes are designed on the basis of tax policy with special tax incentive to tax paying investors. Previously special tax benefits under these schemes were available under Section 80 cc of income tax act 1961, now available under section 80ccb of the act. These are close ended schemes and investment is made for a period of 10 years, although investor can avail themselves of encashment facility after three years, usually the schemes contain several options; There are option for income as well as growth and capital appreciation. Upto march 1996 the number of tax savings schemes was 50 which collectively mobilized 6.4% of total funds. Indian mutual funds have also launched schemes keeping in view the special needs of investors and sometimes in order to give impetus to industrial development. UTI is the pioneer.

Special Schemes: Index schemes

Index funds are schemes that try to invest in those equity shares, which make up a particular index. For example, an Index fund trying to mirror the BSE-30 (Sensex) will invest in only those 30 scripts that constitute this particular index. Investment in these scripts is also made in proportion to each stocks weight in the index.

Sector specific Schemes

Sector specific Schemes or Sectoral Funds are those, which invest exclusively in a specified industry or a group of industries or various segments such as 'A' Group shares or initial public offerings. The returns are high but the risks taken are also very high. This type of investment is for short term.

Industry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like InfoTech, FMCG, and Pharmaceuticals etc.

ADVANTAGES OF MUTUAL FUNDS:

The reason that mutual funds are so popular is that they offer the ability to easily invest in increasingly more complicated financial markets. A large part of the success of mutual funds is also the advantages they offer in terms of diversification, professional management and liquidity.

Flexibility - Mutual Fund investments also offers you a lot of flexibility with features such
as systematic investment plans, systematic withdrawal plans & dividend reinvestment.

Affordability - They are available in units so this makes it very affordable. Because of the
large corpus, even a small investor can benefit from its investment strategy.

Liquidity - In open ended schemes, you have the option of withdrawing or redeeming your
money at any point of time at the current NAV.

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Diversification - Risk is lowered with Mutual Funds as they invest across different
industries & stocks.

Professional Management - Expert Fund Managers of the Mutual Fund analyses all
options based on experience & research.

Potential of return -The fund managers who take care of your Mutual Fund have access to
information and statistics from leading economists and analysts around the world. Because of this, they are in a better position than individual investors to identify opportunities for your investments to flourish.

Low Costs - The benefits of scale in brokerage, custodial and other fees translate into lower
costs for investors.

Regulated for investor protection - The Mutual Funds sector is regulated to safeguard
the investor's interests.

Investment Mix
Mutual Funds in India invest in three broad kinds of instruments, they are
1. 2. 3.

Equity shares and equity related instruments ( convertible debentures, warrants) Debt instruments ( non convertible debentures, public sector bonds, Govt securities) Money market instruments ( certificates of deposits, treasury bills, commercial bills)

41

The asset mix of a mutual fund scheme is influenced by the objective of the schemes. Equity Debt Instruments Money Market Instruments

Growth Schemes Income Schemes Balanced Schemes

70-90% 20-30% 40-60%

5-20% 60-70% 40-50%

0-10% 0-15% 0-10%

2.6 SWOT ANALYSIS OF MUTUAL FUNDS

STRENGTHS:
1. Simply speed and quality of services offer by mutual fund companies. 2. As on investment tool for the investors to boost their savings. 3. Wide range of investment schemes offered by mutual fund companies to meet various requirements of investors.

WEAKNESS:
1.

NAV range doesnt seem to fit in with corporate compensations. That is positioning and pricing problem.

2.

Delays in infrastructure development may dampen the growth rate NAVs of different schemes, which in turn affect the investor to invest.

3. 4.

Deregulation of interest rates may affect the profitability of companies. Stiff competition from existing from mutual fund companies and new entrants.

5.

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OPPORTUNITIES:
1. 2.

Perceptive changes in life style. Addition of level of new class of entrepreneurs to the broad base of middle class of the market.

3.

The range of schemes and services offered by mutual fund companies is large enough for all investors to have a slice of cake.

4.

The falling interest rates would make to raise capital at less cost. Hence more opportunities for the companies.

5.

Globalization is buying fresh opportunities in terms of foreign tie-ups.

THREATS:
1. 2.

Risk of scams. Several increase in the competition among mutual fund companies result in decreasing the spread.

43

Positioning of funds in various categories and ratios Value funds category

A Mutual fund that primarily holds value stocks deemed to be undervalued in price. The premise of value investing is that the market has inherent inefficiencies that enable companies to trade at levels below what the are actually worth. In theory, once the market corrects these inefficiencies the value investor will see the share price rise.

A common misconception is that value investors simply seek out low P/E stocks. Although this can be a characteristic of an undervalued company, this is not the sole feature that astute value investors seek.

Growth funds category

Growth funds are those mutual funds that aim to achieve capital appreciation by investing in growth stocks. They focus on those companies, which are experiencing significant earnings or revenue growth, rather than companies that pay out dividends. Growth funds tend to look for the fastest-growing companies in the market. Growth managers are willing to take more risk and pay a premium for their stocks in an effort to build a portfolio of companies with above-average earnings momentum or price appreciation. In general, growth funds are more volatile than other types of funds, rising more than other funds in bull markets and falling more in bear markets. Only aggressive investors, or those with enough time to make up for short-term market losses, should buy these funds.

Large cap funds

44

Large cap stock funds seek to provide long-term growth potential and current income by investing in the stocks of large companies - those with market capitalizations generally above $5 billion. Large cap funds tend to offer greater growth potential than bonds, but tend to be more volatile.

Mid cap funds

Mid cap stock funds invest in the stocks of midsize companies - those with market capitalization of $1-10 billion - and seek to provide long-term growth of capital. Mid cap funds tend to offer more growth potential than large company stock funds with less volatility than small company stock funds.

Small cap funds

Small cap stock funds seek to provide above-average long-term growth by investing in the stocks of small, fast-growing companies - those with market capitalization generally below $2 billion. Small cap stock funds tend to have a wider spectrum of risk and return potential than investments in larger companies.

2.7 RISK ASSOCIATED WITH MUTUAL FUND INVESTMENT

45

At the cornerstone of investing is the basic principle that the greater the risk you take, the greater the potential reward. 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 investors. Some investor 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.

Mutual Funds offer incredible flexibility in managing Investment risk. Diversification and Automatic Investing (SIP) are two key techniques you can to reduce your investment risk considerably and reach your long-term financial goals.

TYPES OF RISKS:
All investment involve some from of risk. Even an insured bank account is subject to the possibility that inflation will rise faster than your earning, 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). Consider these common types of risk and evaluate them against potential rewards when you selects an investment.

MARKETS RISK
46

At times the prices or yields of all the securities in a particular market rise or fall due to broad outside influence. When this happen, 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 Risks: Sometimes referred to as loss of purchasing power. Whenever inflation sprints forward faster than earnings on your investment, you run the risk that youll 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 able to pay the interest you are promised, or repay your principal when the investment matures?

Interest Risk: Changing interest rates affect both equities and bonds in many ways. Investors are reminded that predicting which way rates wick go is rarely successful. A diversified portfolio can help in offsetting these changes.

KEY CONCEPTS:
47

Net Asset Value (NAV) The net asset value of the fund is the cumulative market value of the assets fund net of its liabilities. In other words, if the fund is dissolved or liquidated, by selling off all the assets in the fund, this is the amount that the shareholders would collectively own. This gives rise to the concept of net asset value per unit, which is the value, represented by the ownership of one unit in the fund. It is calculated simply by dividing the net asset value of the fund by the number of units. However, most people refer loosely to the NAV per unit as NAV, ignoring the "per unit". We also abide by the same convention. Calculation of NAV The most important part of the calculation is the valuation of the assets owned by the fund. Once it is calculated, the NAV is simply the net value of assets divided by the number of units outstanding. Sale Price It is the price you pay when you invest in a scheme. It is also called as Offer Price. It may include a sales load.

Repurchase Price It is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price.

Redemption Price
48

It is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related.

Sales Load It is a charge collected by a scheme when it sells the units. Also called, Front-end load. Schemes that do not charge a load are called No Load schemes. Repurchase or Back End Load It is a charge collected by a scheme when it buys back the units from the unit holders.

2.8 VALUATION OF MUTUAL FUND

The net assets value of the Fund is the cumulative market value of the assets Fund net of its liabilities. The Fund is dissolved or liquidated, by selling off all the assets in the Fund, this is the amount shareholders would collectively own. This gives rise to the concept of the net assets value per unit, which is the represented by the ownership of one unit in the Fund. It is calculated simply by dividing the net assets value Fund by the number of units. However, most people refer loosely to the NAV per unit as NAV, ignoring the units. We also abide by the same convention.

NET ASSET VALUE (NAV): (THE CONCEPT)

49

The net assets value of the fund is the cumulative market value of the assets fund net of its liabilities. This is the value that a unit holder gets if he redeems his funds or a fresh has to pay if he buys unit in his referred to as NAV p.u. Calculation of NAV The most important part of the calculation is the valuation of the assets owned by the Fund. Once it is calculated the NAV is simply the net value of the assets divided by the number of units outstanding. The detailed method for the calculation of the net asset value is given below the net asset value is the actual value of a unit on any business day. NAV is the barometer of the performance of the scheme. The net asset value is the market value of the assets of the schemes minus its liabilities and expenses. The NAV is the net asset value of the scheme divided by the number of units outstanding on the valuation

NAV is calculated as follows:

Market value of Fund investment + receivables + accrued income- liabilities accrued expenses Number of units outstanding

Total market value of all MF holdings-All MF liabilities NAV of MF = No. of MF units or shares

50

2.9 VOLATILITY MEASUREMENT OF MUTUAL FUND

When considering a funds volatility, an investor may find it difficult to decide which fund will provide the optimal risk-reward combination.

OPTIMAL PORTFOLIO THEORY AND MUTUAL FUNDS One examination of the relationship between portfolio returns and risk is the efficient frontier, a curve that is a part of the modern portfolio theory. The curve forms from a graph plotting return and risk indicated by volatility, which is represented by standard deviation. According to the modern portfolio theory, funds lying on the curve are yielding the maximum return possible given the amount of volatility.

Standard Deviation ():

The standard deviation essentially reports a funds volatility, which indicates the tendency of the returns to rise or fall drastically in a short period of time. A security that is volatile is also considered higher risk because its performance may change quickly in either direction at any moment. The standard deviation of a fund measures this risk by measuring the degree to which the fund fluctuates in relation to its mean return, the average return of a fund over a period of time.

A fund that has a consistent four-year return of 3%, for example, would have a mean, or average, of 3%. The standard deviation for this would be 0 because the funds return in any given year does not differ from its four-year mean of 3%. On the other hand, a fund that in each of the last four-year returned- 5%, 17%,

51

2%,and 30% will have a mean return of the 11%. The fund will also exhibit a high standard deviation because each year. The return of the fund differs from the mean return. This fund is therefore more risky because it fluctuates widely between negative and positive returns within a short period.

Beta (): While standard deviation determines the volatility of a fund according to the disparity of its return over a period of time, beta, another useful statistical measure, determines the volatility, or risk, of a fund in comparison to that of its index or benchmark. A fund with a beta very close to 1 means the funds performance closely matches the index or benchmarka beta greater than 1 indicates greater volatility than the overall market, and beta less than 1 indicates less volatility than the benchmark.

R-Square (R): The R-square of a fund advises investors if the beta of a mutual fund is measured against an appropriate benchmark. Measuring the correlation of a funds movements to that of an index, R-squared describe the level of association between the funds volatility and market risk, or more specifically, the degree to which a funds volatility is a result of the day-to-day fluctuations experienced by the overall market.

R-squared values range between 0 and 1, where 0 represents the least correlation and 1 represents full correlation. If a funds beta has an R-squared value that is close to 1, the
52

beta of the fund should be trusted. On the other hand, an R-squared value that is close to 0 indicates that the beta is not particularly use full because the fund is being compared against an appropriate benchmark.

Alpha (): Up to this point, we have learned how to examine figures that measure risk posed by volatility, how so we measure the extra return rewarded to you for taking on risk posed by factors other than market volatility? Enter alpha, which measure how much if any of this extra risk helped the fund outperform its corresponding benchmark. Using beta, alphas computation compares the funds performance to that of the benchmarks risk-adjusted returns and establishes if the funds returns outperformed the markets given the same amount of risk. For example, if a fund has an alpha of 1, it means the fund outperformed the benchmark by 1%. Negative alphas are bad in that they indicate that the fund under performed for the amount of extra, fund-specific risk that the funds investors undertook.

Conclusion
53

This explanation of these four statistical measure provide with the basic knowledge on using them apply the premises of the optimal portfolio theory, which uses volatility to establish risk and states a guideline for determining how much of a funds volatility carries a higher potential for return.

Benchmarks used in Mutual Fund Industry The BSE Sensex and S&P CNX Nifty are used as a benchmark for actively managed all equity portfolios. If the equity portfolio is broader based, S&P CNX 500 is used as the benchmarks. For bond funds, the IBex, an index for government bonds is used as benchmark.

2.10 ARTICLES
54

The Performance of Mutual Funds in the Period 1945-1964 Authors: Michael C. Jensen
1. In this risk-adjusted measure of portfolio performance that estimates how much a manager's forecasting ability contributes to the fund's returns. 2. The measure is based on the theory of the pricing of capital assets by Sharpe (1964), Lintner (1965a) and Treynor (Undated). 3. The measure to estimate the predictive ability of 115 mutual fund managers in

the period 1945-1964 - that is their ability to earn returns which are higher than those we would expect given the level of risk of each of the portfolios. 4. It is also important to note that these conclusions hold even when we measure the fund returns gross of management expenses

The persistence of Risk-adjusted Mutual Fund Performance

55

Authors: Elton, Edwin J. Gruber, Martin J. Blake, Christopher R.

1. There is overwhelming evidence shows that mutual fund managers on average underperformed a combination of passive portfolios of similar risk. 2. Numerous index funds, which track the S&P 500 index or various small-stock, bond, value, growth, or international indexes, are now widely available to individual investors. 3. These same choices have been available to institutional investors for some time. Given that there are sufficient index funds to span most investors risk choices, that the index funds are available at low cost, and that the low cost of index funds means that a combination of index funds is likely to outperform an active fund of similar risk.

56

Measuring mutual fund performance with characteristic based benchmark

Authors: kent danial et.al

1. Managers can select stocks that out performance the average stock having the same characteristics 2. The database of M F holdings covering over 2500 equity funds from 1975 to 1994 3. Funds exhibit no characteristic timing ability

The persistence of M F performance

57

Mark Grinblatt et.al

1. This analysis mutual fund performance relates to past performance.

2. These tests are based on a multiple portfolio benchmark that was formed. On the basis of securities characteristics.

3. We find evidence that difference in performance between funds persist over time and that.

4. This persistence is consistent with the ability of fund management to earn abnormal returns.

58

CHAPTER 3
COMPANY PROFILE

59

3.1 INTRODUCTION
HISTORY In 1982, a ground of practicing chartered accountants with meager resources, joined hands to promote karvy consultants ltd., to offer corporate advisory services using information technology as a value added tool to enhance service. By 1985 these corporate grew. And to help service their needs in capital market related Areas , Karvy assumed the role of registers and share transfer agents with the belief that Professionalism and a service ethic would create a market niche in the fiercely competitive field of financial services . A decade of commitment , professional integrity, toil and foresight fallowed and Karvy Achieved a leadership position in their new chosen field , by virtue of handling 104 pub- Lic issues in from1994 to 95, the largest number ever handled by a register, in the history Of the Indian stock market in a year, their after Karvy systematically made inroads in to a Host of capital market related services, corporate financial services and retail financial Services, all of which have contributed to evolution of a rare but vital business synergy Today Karvy had access to millions of Indian shareholders in addition to companies and Banks and financial institutions. In the process it has also built up a positive reputation With regulatory authorities and other government agencies .display in unwiring commi- Tment and generating confidence over each transaction Karvy has proved its mettle ev-Ry time.

3.2 RANGE OF SERVICES ISSUE SERVICING : Registered as a category I a registrar with securities and exchange board of India(SEBI) Karvy reacted positively to the tremendous growth in the capital market as registrars to Issues. Starting with 4 IPOs in the first year of operation, the company has so far hand- Led nearly 550 public issues. The growth has earned it has coveted position of the No1Registrars in India.

60

CORPORATE SHARE HOLDER SERVICING

Karvy offers a vast spectrum of services its corporate clients which are directed towords Fulfilling the share holder servicing needs from processing inquiries to effective transfers Acting on way of over 175 corporate clients. Krvys shareholder servicing division manag- Es relations with over 78 lakh investors. MUTUAL FUND INVESTOR SERVICING As a part of its service range, Karvy provides mutual fund investor services to about 40% Of the asset management companies in India and as a result, is now strategically placed to make rapid strides in this area of business Karvy provides purchase, redemption and Cash management support through its wide network , virtually across the counter, their By investors a high degree of liquidity on their investments.

KARVY DEPOSITERS SERVICES A separate and strong distribution arm has been structured for retailing fixed in come products to investors seeking fixed returns. Marketing fixed deposits programs of over 250 companies, this division has mo bilized funds from the different parts of the country Karvys own fixed deposited scheme has been rated MAA by ICRA.

INVESTOR SERVICES

Karvys role as a pioneer in providing quality investor services is evident from its wide net work of 62 investor service centers established across the country. Manned by competent professionals , these centers provide comprehensive services under one roof facilitating easy transactions for individual investors .A unique concept of mobile investor service center as also been successfully tested in Bangalore and the same will Be extended to other cities.

61

3.3 KARVY SECURITIES LIMITED With in a short span of time Karvy securities ltd has become one of the top fund mobilizes in the country for the equity market .A member of the Hyderabad stock Exchange, KSL is also engaged in trading on the secondary market. 3.4 KARVY STOC BROKING LIMITED Karvy stock broking limited has been incorporated to exchange service to cater to their Trading requirements on the national stock exchange of India limited.

62

3.5 OBJECTIVE
1.

Create a single integrated national-level solution with access to multiple markets by providing high cost-effective service to investors across the country.

2.

Create a liquid and vibrant national-level market for all listed companies in general and small capital companies in particular.

3.

Optimally utilizing the existing infrastructure and other resources of Participating Stock Exchanges, which are under-utilized now.

4.

Provide a level playing field to small Trading Members by offering opportunity to participate in a national market for investment-oriented business.

5.

Provide clearing and settlement facilities to the Trading Members across the country at their doorstep in a decentralized mode.

6.

Spread demat trading across the country.

BOARD OF DIRECTORS
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Shri S. Ravi - Public Interest Director Shri K. Rajendran Nair - Public Interest Director Shri P. J. Mathew - Managing Director Shri M. K. Ananda Kumar - Shareholder Director, Bangalore Stock Exchange Shri K. D. Gupta - Shareholder Director, Uttar Pradesh Stock Exchange Shri T. N. T. Nayar - Shareholder Director, Cochin Stock Exchange Shri P. Sivakumar - Shareholder Director, Madras Stock Exchange Shri Sanjeev Puri - Shareholder Director, Shri Maninder Singh Grewal - Shareholder Director Shri Jambu Kumar Jain - Trading Member Director, Gauhati Stock Exchange Shri Rajiv Vohra - Trading Member Director

63

CHAPTER 4
DATA ANALYSIS & INTERPRETATION

64

ANALYSIS HDFC BANKING SECTOR FUND Latest NAV Name Type Launch Date Fund Category Face Value Min. Subscription Amount 52 Week High(1 yr) (jan 07,2011) 52 Week low (1 yr) (oct 27,2011) Asset size (28 nov 2011) Entry Load : Entry load of 2.25%, in respect of : 814.31cr : Rs 38.24 : : : : : : : : Rs 43.14 HDFC Banking Sector Fund Open Ended 11, Sep, 2000 open ended Rs 10 Rs 5,000 Rs 82.13

each purchase / switch-in of units less than Rs 5 crore in value. Exit load :
65

Nil

Return Summery of HDFC Return% 1 Week Absolute Relative to Sensex Relative to Nifty Table -1 RELIANCE BANKING SECTOR FUND Latest NAV
(30 dec 2011)

3 Months -21.3 -1.36 -2.28

6 Months -29.3 -12.4 -3.37

1 Year -42.7 -14.53 -16.25

3 Years 30.5 -6.58 -2.82

5.5 1.28 1.39

: : : : : : : : : : :

Rs 223.391 Reliance Banking Sector Open Ended 8th Sep, 1995 Equity growth. Rs 10 Rs 5,000 Rs 406.32 Rs 195.8 3256.18 cr (31 dec 2011) Nil {>=5 Crores} 2.25 %{< =2 crores}

Name Fund Type Launch Date Fund Category Face Value Min. Subscription Amount 52 Week High(1 yr) (feb 05,2011) 52 Week low (1 yr) (dec 02,2011) Total Assets Entry Load

1.25 %{> =2 Cr/<=5Crores}

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Exit load

Nil

Return Summery Return% 1 Week Absolute -4.5 Relative -1.01 to Sensex Relative to Nifty Table - 2 -0.90 3 Months 6 Months 1 Year -8.6 -15.3 -37.4 -0.31 -3.06 -7.67 -1.23 -4.34 -5.95 3 Years 22.7 -nm -nm

High/ low of NAVS (JAN 2011 to DEC 2011) Reliance Banking Sector fund
Table 3 Month January February March April May June July August September October November December High(Rs) 70.62 65.93 58.41 57.68 58.27 51.30 50.80 54.05 52.77 47.66 42.57 41.47 Low(Rs) 61.89 60.21 49.79 51.40 51.40 43.42 46.70 47.70 45.31 34.81 35.41 35.47

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80 70 60 50 40 30 20 10 0
Au Se gus t pt em be r O ct ob er No ve m be De r ce m be r Ja nu a Fe ry br ua ry M ar ch Ap ril M ay Ju ne Ju ly

High Low

Chart - 1 INTERPRETATION As per the given data in the month of jan-11 the majority of NAVs were found to be higher and then in the month of oct-11 it was comparatively low.

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HIGH/LOW OF NAVS (JAN 2011 TO DEC 2011) HDFC BANKING SECTOR FUND Table 4 Month JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DES High 40.46 34.87 63.97 66.19 66.85 62.O2 58.78 60.58 60.61 53.76 45.44 42.95 Low 32.43 31.12 30.93 60.81 62.41 53.47 50.76 57.23 53.37 38.23 38.50 39.70

80 70 60 50 40 30 20 10 0 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DES HIGH LOW

Chart - 2 INTERPRETATION As per the given data in the month of may-11 the majority of NAVs were found to be higher and then in the month of mar-11 it was comparatively low.

Performance of HDFC and Reliance (up to 31 Dec 2011)

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Table - 5 Month 1 MONTH 3 MONTHS 6 MONTHS 1 YEAR 2 YEARS HDFC 5.5% -21.3% -42.7% -8.6% 30.5% Reliance -5.5% -8.6% -37.4% -2% 22.7%

40.00% 30.00% 20.00% 10.00% 0.00% 1 MONTH 3 MONTHS 6 MONTHS -10.00% -20.00% -30.00% -40.00% -50.00% HDFC 1 YEAR 2 YEARS Reliance

Chart - 3

INTERPRETATION
1. 2. As per the given data of HDFC the highest is 30.5% and lowest is -42.7% As per the given data of Reliance the highest is 22.7% and lowest is -37.4%

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CHAPTER 5
SUMMARY & CONCLUSIONS

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5.1 FINDINGS
1.

By nature the sectorial funds have very high risk the returns are also the same as risk both funds are growth funds so we taken as returns

2.

By observing the both funds we can easily find out, that is they performed well in the previous years.

3.

The HDFC fund has given moderate returns of 30.5% per unit and the reliance has given returns of 22.7% per unit

4.

The main thing is they both funds are given more then other returns as compared to bank rates and other fixed deposits.

5.

Low level fluctuation in the month to quarterly, half yearly performance but overall fund yearly performance is very high (HDFC-30.5%, Reliance 22.7%)

6.

The main reason of both funds performance is their portfolio. All leading national and private banks are performing and declaring less return to the share holders when compared to other funds.

7.

From the past performance we can conclude that the both funds will perform well in future.

8.

From these funds performance we can conclude that Indian mutual fund industry has a good future.

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5.2 SUGGESTIONS

11

Since all the funds returns are beating the market returns in past,

and the funds are giving good returns. The present investing is quite helpful to investors.

11

Since most of the investors are working in the private sector it is

all the more necessary to give Equity flavor to ones investment portfolio so that they can have a comfortable post retirement life.

11

It is always better to make regular investments to let the corpus

grow. Regular investments help to reduce the risk of trying to time the market. So if one keeps such investment horizon and invests regularly, one can make gains irrespective of market falls during that period. Many mutual funds offer wavier of entry loads when investments are made through Systematic investment plan. Investor should try to make use of this opportunity.

11

It is always convenient to save small amounts on a monthly basis

as compared with large savings on an ad hoc basis.

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55

If there is a chance of withdrawal of investment, it should be made

in debt instruments. 55 Other short-term investments must be made in low risk

investments. 55 It is important to select the fund carefully. The most important

factor while selecting a fund is the suitability. A fund may be best available in the market if it doesnt match the requirement, skip the fund. The performance of the mutual fund over a long time horizon should be taken into consideration. Short-term performances are like a flash in the pan and should not be the guiding factor for any investment decision. 55 Diversification is the best strategy to mitigate the downside risk in

an investment portfolio. Investments should be made in various funds so that one is exposed to all market capitalizations. 55 Mutual funds should not compare with stocks i.e. comparing

return of an individual stock with that of a diversified fund is not logical.

111

Investors should invest in equities for a long term, which

generates higher returns and should invest in debt funds for short term.

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5.3 CONCLUSIONS Mutual funds assume greater importance in a scenario of increasing inflation. With inflation hovering around 5 % to 6 %, poised for greater heights, investing in avenues, which just offer breakeven returns, exposes the investment portfolio to inflation risk. Investment in equity either directly or through the mutual fund route provides an effective hedge mechanism against such a potent threat. So, investing in mutual funds is a better option for investors depending upon their objective and requirements.

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BIBLIOGRAPHY

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BOOKS:
1. KRISHNA MURTHY.S, MUTUAL FUNDS IN INDIA, Second Edition, MS. Chandra, Calcutta. 2. V.A. AVADHANI, INVESTMENT MANAGEMENT, Fourth Edition 2000, Himalaya publications, Hyderabad.

NEWS PAPER & MAGAZINE:

1. Economic Times 2. Business World

FACT SHEETS:
HDFC, REALINCE MUTUAL FUND

WEB SITES:
1. http://www.iseindia.com
2. 3. 4.

http://www.mutualfundsindia.com http://www.bseindia.com http://www.nseindia.com

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