Geeta Fin Project

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Introduction to Mutual Funds:

Concept

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 then invested in capital market

instruments such as shares, debentures and other securities. The income earned through these

investments and the capital appreciation realized is shared by its unit holders in proportion to

the number of units owned by them. Thus a Mutual Fund is the most suitable investment for

the common man as it offers an opportunity to invest in a diversified, professionally managed

basket of securities at a relatively low cost. The flow chart below describes broadly the

working of a mutual fund.

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and

investing funds in securities in accordance with objectives as disclosed in offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and

thus the risk is reduced. Diversification reduces the risk because all stocks may not move in

the same direction in the same proportion at the same time. Mutual fund issues units to the

investors in accordance with quantum of money invested by them. Investors of mutual funds

are known as unit holders.

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

normally come out with a number of schemes with different investment objectives that are

launched from time to time. A mutual fund is required to be registered with Securities and

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Exchange Board of India (SEBI), which regulates securities markets before it can collect

funds from the public.

Different investment avenues are available to investors. Mutual funds also offer good

investment opportunities to the investors. Like all investments, they also carry certain risks.

The investors should compare the risks and expected yields after adjustment of tax on

various instruments while taking investment decisions

Organisation of a Mutual Fund:

A mutual fund is set up in the form of a trust, which has sponsor, trustees, Asset

Management Company (AMC) and custodian. The trust is established by a sponsor or more

than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its

property for the benefit of the unitholders. Asset Management Company (AMC) approved by

SEBI manages the funds by making investments in various types of securities. Custodian,

who is registered with SEBI, holds the securities of various schemes of the fund in its

custody. The trustees are vested with the general power of superintendence and direction

over AMC. They monitor the performance and compliance of SEBI Regulations by the

mutual fund SEBI Regulations require that at least two thirds of the directors of trustee

company or board of trustees must be independent i.e. they should not be associated with the

sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are

required to be registered with SEBI before they launch any scheme

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Mutual fund structure:

The structure consists of:

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 Funds) Regulations,

1996.The Sponsor is not responsible or liable for any loss or shortfall resulting from

the operation of the Schemes beyond the initial contribution made by it towards

setting up of the Mutual Fund

Trust: The Mutual Fund is constituted as a trust in accordance with the provisions of

the Indian Trusts Act, 1882 by the Sponsor. The trust deed is registered under the

Indian Registration Act, 1908

Trustee: Trustee is usually a company (corporate body) or a Board of Trustees (body

of individuals). The main responsibility of the Trustee is to safeguard the interest of

the unit holders and inter alia ensure that the AMC functions in the interest of

investors and in accordance with the Securities and Exchange Board of India (Mutual

Funds) Regulations, 1996, the provisions of the Trust Deed and the Offer Documents

of the respective Schemes. At least 2/3rd directors of the Trustee are independent

directors who are not associated with the Sponsor in any manner

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Asset Management Company: The Trustee as the Investment Manager of the

Mutual Fund appoints the AMC. 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. Atleast 50% of the directors of the AMC are

independent directors who are not associated with the Sponsor in any manner. TheAMC must have a net worth of atleast 10 crore at all times

Registrar or Transfer agent: The AMC if so authorized by the Trust Deed appoints

the Registrar and Transfer Agent to the Mutual Fund. The Registrar processes the

application form; redemption requests and dispatches account statements to the unit

holders. The Registrar and Transfer agent also handles communications with

investors and updates investor records

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Need and Importance of the Study

People always would be in a perception to save the surplus money that they earn.

There are many modes of saving the money. While making an investment people have to

clearly and carefully think as to how well their money can be distributed among various

means of investing, so that they can earn the maximum benefits from what they have

invested. 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 then invested in capital market

instruments such as shares, debentures and other securities. Mutual fund organizations serve

the investors purpose by making a portfolio of where all to invest their money so as to get

maximum returns. Here again arises a confusion of choosing whether to buy mutual funds

from public sector companies or private sector companies. The need of the present study is to

analyze and compare Mutual funds sold by Public sector and private sector companies and

give a feasible solution to the investors.

Objective of the study

The study totally attempts to know the performance of public and private sector mutual

funds.

Primary Objective:

Measuring the performance of the following.

ICICI Pru emerging star fund

Reliance equity opp fund- retail plan (G)

SBI magnum emerging fund (G)

Birla Sun life yield plus (G)

Secondary objective:

Measuring the Five Year quarterly returns of different schemes taken and comparing

it with the benchmark performance.

To measure return and risk of investing in mutual funds.

To measure the fund performance.

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Scope of the study

The historical performance of the fund is compared with the performance of the market

(Nifty). Both the historical data of the fund and the Market is used for analysis. The internal

factors contributing for the performance of this specific fund is not included in the scope of

the study. The scope of the study is confined to the performance of this specific fund in

comparison to the prevailing market conditions. The market being a major factor affecting

the mutual funds performance, the market conditions play a critical role despite the

precautions taken by the fund managers. The care taken by the fund managers does not fall in

the scope of the study. The scope of the study is limited to the performance of the fund in the

existing market conditions. The scope is confined only to two public companies namely UTI

and two private sector companies TATA and Reliance.

Research methodology:

The data for the study is collected from two main sources.

1. primary source

2. secondary source

Primary source:

The data is collected through interaction with the official in the company.

Secondary source:

The secondary source has been collected through the following sources.

Web sites

Mutual fund books

News papers and magazines.

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Limitations of the Study:

The study is conducted in short period i.e. for 2005 - 2009 due to which it may not

be detailed in all the aspects.

The study is limited only to the analysis of different schemes and its suitability to

different investors according to their risk taking ability.

Different people may interpret the same analysis in different ways.

The analysis done only on basis of returns.

Mutual funds are restricted to Equity- diversified schemes only.

Mutual funds are restricted to Growth plan only

Performance evaluation is done to four mutual funds by taking quarterly returns

only.

As the study is based on five years data only entire findings cannot be generalized.

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Company Profile

India InfolineLimited a one-stop financial services shop, most respected for quality of its

advice, personalized service and cutting-edge technology.

The India Infoline group, comprising the holding company, India infoline limited and its

wholly-owned subsidiaries, straddle the entire financial services space with offerings ranging

from equity research, equities and derivatives trading, commodities trading, portfolio

management services, mutual funds, life insurance, fixed deposits, goi bonds and other small

savings instruments to loan products and investment banking.

India Infoline also owns and manages the websites www.indiainfoline.com and

www.5paisa.com the company has a network of over 2100 business locations (branches andsub-brokers) spread across more than 450 cities and towns. The group caters to

approximately a million customers.

Vision Statement:

Our vision is to be the most respected company in the financial services space.

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Board of Directors

1 Mr.Nirmal Jain

Chairman and managing director

India infoline securities Pvt.Ltd.

India infoline Insurance services Ltd.

India infoline Commodities Pvt.Ltd.

2 Mr.R.Venkataraman

Executive Director

India infoline Insurance services Ltd.

India infoline.com

Distribution company Ltd.

3 Mr. Sat Pal Khattar

Non-Executive Director

AB Hotels Ltd.

GTL Ltd.

Prime vetcare Pvt.Ltd.

4 Mr.Sanjiv Ahuja

Non-Executive Independent Director

Pagro Foods Ltd.

India infoline insurance services Ltd.

5 Mr. Kranti Sinha


Hindustan Motors Ltd.

Larsen and Toubro Ltd.

6 Mr. Nilesh ShivjiVikamsey


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Alpha Garments Pvt. Ltd.

History:

We were founded in 1995 by Mr. Normal Jain (Chairman and Managing Director) as an

independent business research and information provider. We gradually evolved into a one-

stop financial services solutions provider. Our strong management team comprises competent

and dedicated professionals

We are a pan-India financial services organization across 1,361 business locations and a

presence in 428 cities. Our global footprint extends across geographies with offices in New

York, Singapore and Dubai. We are listed on the Bombay Stock Exchange (BSE) and the

National Stock Exchange (NSE).

We offer a wide range of services and products comprising broking (retail and institutionalequities and commodities), wealth management, credit and finance, insurance, asset

management and investment banking.

We are registered with the BSE and the NSE for securities trading, MCX, NCDEX and

DGCX for commodities trading, CDSL and NSDL as depository participants. We are

registered as a Category I merchant banker and are a SEBI registered portfolio manager. We

also received the FII license in IIFL Inc. IIFL Securities Pte Ltd received approval from the

Monetary Authority of Singapore to carry out corporate advisory and dealing in securities

operations. Two subsidiaries India Infoline Investment Services and Moneyline Credit

Limited are registered with RBI as non-deposit taking non-banking financial services

companies. India infoline Housing Finance Ltd, the housing finance arm, is registered with

the National Housing Bank.

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Products and Services

Equities:

Indiainfoline provided the prospect of researched investing to its clients, which was

hitherto restricted only to the institutions. Research for the retail investor did not exist prior

to Indiainfoline. Indiainfoline leveraged technology to bring the convenience of trading to the

investors location of preference (residence or office) through computerized access.

Indiainfoline made it possible for clients to view transaction costs and ledger updates in real

time.

PMS:

Our Portfolio Management Service is a product wherein an equity investment portfolio is

created to suit the investment objectives of a client. We at Indiainfoline invest your resources

into stocks from different sectors, depending on your risk-return profile. This service is

particularly advisable for investors who cannot afford to give time or don't have that

expertise for day-to-day management of their equity portfolio.

Research:

Sound investment decisions depend upon reliable fundamental data and stock selection

techniques. Indiainfoline Equity Research is proud of its reputation for, and we want you to

find the facts that you need. Equity investment professionals routinely use our research and

models as integral tools in their work. They choose Ford Equity Research when they can

clear your doubts.

Commodities:

Indiainfolines extension into commodities trading reconciles its strategic intent to emerge

as a one-stop solutions financial intermediary. Its experience in securities broking has

empowered it with requisite skills and technologies. The Companys commodities business

provides a contra-cyclical alternative to equities broking. The Company was among the first

to offer the facility of commodities trading in Indias young commodities market (the MCX

commenced operations only in 2003). Average monthly turnover on the commodity

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exchanges increased from Rs 0.34 bn to Rs 20.02 bn. The commodities market has several

products with different and non-correlated cycles. On the whole, the business is fairly

insulated against cyclical gyrations in the business.

Mortgages

During the year under review, Indiainfoline acquired a 75% stake in Moneytree

Consultancy Services to mark its foray into the business of mortgages and other loan

products distribution. The business is still in the investing phase and at the time of the

acquisition was present only in the cities of Mumbai and Pune. The Company brings on

board expertise in the loans business coupled with existing relationships across a number of

principals in the mortgage and personal loans businesses. Indiainfoline now has plans to roll

the business out across its pan-Indian network to provide it with a truly national scale in

operations.

Home & Personal Loans

Loan against residential and commercial property, Expert recommendations,Easy

documentation, Quick processing and disbursal, No guarantor requirement

Invest Online

Indiainfoline has made investing in Mutual funds and primary market so effortless. All you

have to do is register with us and thats all. No paperwork no queues and No registration

charges.

Invest In Mf

Indiainfoline offers you a host of mutual fund choices under one roof, backed by in-depth

research and advice from research house and tools configured as investor friendly.

SMS

Stay connected to the market. The trader of today, you are constantly on the move. But how

do you stay connected to the market while on the move? Simple, subscribe to Indiainfoline's

Stock Messaging Service and get Market on your Mobile!

There are three products under SMS Service:

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Market on the move.

Best of the lot.

VAS (Value Added Service)

Insurance

An entry into this segment helped complete the clients product basket; concurrently, it

graduated the Company into a one-stop retail financial solutions provider. To ensure

maximum reach to customers across India, we have employed a multi pronged approach and

reach out to customers via our Network, Direct and Affiliate channels. Following the opening

of the sector in 1999-2000, a number of private sector insurance service providers

commenced operations aggressively and helped grow the market.

The Companys entry into the insurance sector derisked the Company from a predominant

dependence on broking and equity-linked revenues. The annuity based income generated

from insurance intermediation result in solid core revenues across the tenure of the policy.

Wealth Management Service

Imagine a financial firm with the heart and soul of a two-person organization. A world-

leading wealth management company that sits down with you to understand your your needs

and goals. We offer you a dedicated group for giving you the most personal attention at every

level.

Newsletters

The Daily Market Strategy is your morning dose on the health of the markets. Five intra-day

ideas, unless the markets are really choppy coupled with a brief on the global markets and

any other cues, which could impact the market. Occasionally an investment idea from the

research team and a crisp round up of the previous day's top stories. That's not all. As asubscriber to the Daily Market Strategy, you even get research reports of Indiainfoline

research team on a priority basis.

The Indiainfoline Weekly Newsletter is your flashback for the week gone by. A weekly

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outlook coupled with the best of the web stories from Indiainfoline and links to important

investment ideas, Leader Speak and features is delivered in your inbox every Friday evening.

Company structure:

India Infoline Limited is listed on both the leading stock exchanges in India, viz. the Stock

Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a member of

both the exchanges. It is engaged in the businesses of Equities broking, Wealth Advisory

Services and Portfolio Management Services. It offers broking services in the Cash and

Derivatives segments of the NSE as well as the Cash segment of the BSE. It is registered

with NSDL as well as CDSL as a depository participant, providing a one-stop solution for

clients trading in the equities market. It has recently launched its Investment banking and

Institutional Broking business

.

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A SEBI authorized Portfolio Manager; it offers Portfolio Management Services to clients.

These services are offered to clients as different schemes, which are based on differing

investment strategies made to reflect the varied risk-return preferences of clients.

The content services represent a strong support that drives the broking, commodities, mutual

fund and portfolio management services businesses. Revenue generation is through the sale

of content to financial and media houses, Indian as well as global.

It undertakes equities research which is acknowledged by none other than Forbes as 'Best of

the Web' and 'a must read for investors in Asia'. India Infoline's research is available not

just over the internet but also on international wire services like Bloomberg (Code: IILL),

Thomson First Call and Internet Securities where India Infoline is amongst the most read

Indian brokers.

India Infoline Commodities Limited

India Infoline Commodities Pvt Limited is engaged in the business of commodities broking.

Our experience in securities broking empowered us with the requisite skills and technologies

to allow us offer commodities broking as a contra-cyclical alternative to equities broking. We

enjoy memberships with the MCX and NCDEX, two leading Indian commodities exchanges,

and recently acquired membership of DGCX. We have a multi-channel delivery model,

making it among the select few to offer online as well as offline trading facilities

India Infoline Marketing & Services

India Infoline Marketing and Services Limited is the holding company of India Infoline

Insurance Services Limited and India Infoline Insurance Brokers Limited.

(a) India Infoline Insurance Services Limited is a registered Corporate Agent with the

Insurance Regulatory and Development Authority (IRDA). It is the largest Corporate

Agent for ICICI Prudential Life Insurance Co Limited, which is India's largest privateLife Insurance Company. India Infoline was the first corporate agent to get licensed

by IRDA in early 2001

(b) India Infoline Insurance Brokers Limited is a newly formed subsidiary which will

carry out the business of Insurance broking. We have applied to IRDA for the

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insurance broking licence and the clearance for the same is awaited. Post the grant of

license, we propose to also commence the general insurance distribution business.

India Infoline Investment Services Limited

Consolidated shareholdings of all the subsidiary companies engaged in loans and

financing activities under one subsidiary. Recently, Orient Global, a Singapore-based

investment institution invested USD 76.7 million for a 22.5% stake in India Infoline

Investment Services. This will help focused expansion and capital raising in the said

subsidiaries for various lending businesses like loans against securities, SME financing,

distribution of retail loan products, consumer finance business and housing finance

business. India Infoline Investment Services Private Limited consists of the following

step-down subsidiaries.

a) India Infoline Distribution Company Limited (distribution of retail loan products)

b) Moneyline Credit Limited (consumer finance)

c) India Infoline Housing Finance Limited (housing finance)

IIFL (Asia) Pte Limited

IIFL (Asia) Pte Limited is wholly owned subsidiary which has been incorporated in

Singapore to pursue financial sector activities in other Asian markets. Further to

obtaining the necessary regulatory approvals, the company has been initially capitalized

at 1 million Singapore dollars.

Milestones:

In the year 1995:

Incorporated as an equity research and consulting firm with a client base that included

leading FIIs, banks, consulting firms and corporates.

In the year 1999:

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Restructured the business model to embrace the Internet; launched

archives.indiainfoline.com

Mobilized capital from reputed private equity investors.

In the year 2000:

Commenced the distribution of personal financial products; launched online equity

trading.

In the year 2004:

Acquired commodities broking license; launched Portfolio Management Service.

In the year 2005:

Listed on the Indian stock markets

In the year 2006:

Acquired membership of DGCX; launched investment banking services.

In the year 2007:

Launched a proprietary trading platform; inducted an institutional equities team; formed a

Singapore subsidiary; raised over USD 300 mn in the group; launched consumer finance

business under the Moneyline brand.

In the year 2008:

Launched wealth management services under the IIFL Wealth brand; set up India Infoline

Private Equity fund; received the Insurance broking license from IRDA; received the venture

capital license; received in principle approval to sponsor a mutual fund; received Best

broker- India award from Finance Asia; Most Improved Brokerage- India award

from Asiamoney.

In the year 2009:

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Received registration for a housing finance company from the National Housing Bank;

received Fastest growing Equity Broking House - Large firms in India by Dun &

Bradstreet.

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Concepts

Types of Mutual Funds Schemes in India

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial

position, risk tolerance and return expectations etc. thus mutual funds has Variety of

flavors, Being a collection of many stocks, an investors can go for picking a mutual fund

might be easy. There are over hundreds of mutual funds scheme to choose from. It iseasier to think of mutual funds in categories, mentioned below.

Overview of existing schemes existed in mutual fund category: By Structure

1. 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.

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2. 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 fundsgive 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

Key Differences between close and open ended schemes

3. Interval Schemes: Interval Schemes are that scheme, which combines the features of

open-ended the 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.

The risk return trade-off indicates that if investor is willing to take higher risk then

correspondingly he can expect higher returns and vise versa if he pertains to lower risk

instruments, which would be satisfied by lower returns. For example, if an investors opt

for bank FD, which provide moderate return with minimal risk. But as he moves ahead to

invest in capital protected funds and the profit-bonds that give out more return which is

slightly higher as compared to the bank deposits but the risk involved also increases in the

same proportion.

Thus investors choose mutual funds as their primary means of investing, as Mutual funds

provide professional management, diversification, convenience and liquidity. That doesnt

S.No Feature Open end Close end

1 Capitalization Unlimited Limited

2 Any time entry Yes No

3 Any time exit Yes No

4 Tax advantages Yes No

5 Listed on exchange Generally no Yes

6 Available for a

fixed mutual fund

No Yes

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mean mutual fund investments risk free. This is because the money that is pooled in are

not invested only in debts funds which are less riskier but are also invested in the stock

markets which involves a higher risk but can expect higher returns. Hedge fund involves a

very high risk since it is mostly traded in the derivatives market which is considered very

volatile.

Overview of existing schemes existed in mutual fund category: BY NATURE

Equity fund :

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. There are however, many different types of equity funds because there are

many different types of equities. A great way to understand the universe of equity funds is touse a style box, an example of which is below.

The idea is to classify funds based on both the size of the companies invested in and the

investment style of the manager. The term value refers to a style of investing that looks for

high quality companies that are out of favor with the market. These companies are

characterized by low P/E andprice-to-book ratios and high dividend yields. The opposite of

value is growth, which refers to companies that have had (and are expected to continue to

have) strong growth in earnings, sales and cash flow. A compromise between value andgrowth is blend, which simply refers to companies that are neither value nor growth stocks

and are classified as being somewhere in the middle.

For example, a mutual fund that invests in large-cap companies that are in strong financial

shape but have recently seen their share prices fall would be placed in the upper left quadrant

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of the style box (large and value). The opposite of this would be a fund that invests in startup

technology companies with excellent growth prospects. Such a mutual fund would reside in

the bottom right quadrant (small and growth).

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.

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 but are associated with

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

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.

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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

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:

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.

By investment objective.

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 schem

es 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.

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the investors to achieve greater diversification through one scheme. It spreads risks across a

greater universe.

Load or no-load fund: A Load Fund is one that charges a percentage of NAV for entry or

exit. That is, each time one buys or sells units in the fund, a charge will be payable. This

charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV

per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy

would be required to pay Rs.10.10 and those who offer their units for repurchase to the

mutual fund will get only Rs.9.90 per unit. The investors should take the loads into

consideration while making investment as these affect their yields/returns. However, the

investors should also consider the performance track record and service standards of the

mutual fund, which are more important. Efficient funds may give higher returns in spite of

loads.

A no-load fund is one that does not charge for entry or exit. It means the investors can enter

the fund/scheme at NAV and no additional charges are payable on purchase or sale of units.

Mutual funds cannot increase the load beyond the level mentioned in the offer document.

Any change in the load will be applicable only to prospective investments and not to the

original investments. In case of imposition of fresh loads or increase in existing loads, the

mutual funds are required to amend their offer documents so that the new investors are aware

of loads at the time of investments.

Assured return scheme: Assured return schemes are those schemes that assure a specific

return to the unit holders irrespective of performance of the scheme.A scheme cannot

promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is

required to be disclosed in the offer document.

Investors should carefully read the offer document whether return is assured for the entire

period of the scheme or only for a certain period. Some schemes assure returns one year at a

time and they review and change it at the beginning of the next year.

Asset allocation funds: These funds invest in various asset classes including, but not limited

to, equities, fixed income securities, and money market instruments. They seek high total

return by maintaining precise weightings in asset classes. Global asset allocation funds invest

in a mix of equity & debt securities issued worldwide

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Flexible portfolio funds: These funds invest in common stocks, bonds, other debt securities,

and money market securities to provide high total return. These funds may invest up to100

percent in any one type of security and may easily change weightings depending upon

market conditions

High yield funds: These funds invest two-thirds or more of their in lower rated U.S.

corporate bonds.

World bond funds invest in debt securities offered by foreign companies and governments.

They seek the highest level of current income available worldwide.

Advantages Of Investing In Mutual Funds

There are several that can be attributed to the growing popularities and suitability of

mutual funds as an investment vehicle especially for retail investors.

Professional management: Mutual funds provide the services of experienced and skilled

professionals, backed by a dedicated investment research team that analysis the

performance and prospects of companies and selects suitable investments to achieve the

objectives of the scheme.

Diversification: Mutual funds invest in a number of companies across a broad cross-

section of industries and sectors. This diversification reduces the risk because seldom do

all stocks decline at the sane time and in the same proportion. You achieve this

diversification through a mutual fund with far less money than you can do on your own.

Convenient administration: Investing in a mutual fund reduces paperwork and help you

avoid many problems such as bad deliveries, delayed payment and follow up with brokers

and companies. Mutual funds save your time and make investing easy and convenient.

Return potential: Over a medium to long term, mutual funds have the potential to provide

a higher return as they invest in a diversified basket of selected securities.

Low costs: Mutual funds are a relatively less expensive way to invest compared to directly

investing in the capital markets because the benefits of scale in brokerage, custodial and

other fees translate into lower costs for investors.

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Liquidity : In open ended schemes, the investors get the money back promptly at net asset

value related prices from the mutual fund. In closed end schemes, the units can be sold on

a stock exchange at the prevailing market price or the investor can avail of the facility of

direct repurchase at NAV related prices by mutual fund.

Transparency: You get regular information on the value of your investment in addition to

disclosure on the specific investments made by your scheme, the proportion invested in

each class of assets and the fund managers investment strategy and outlook.

Flexibility: Through features such as regular investment plans, regular withdrawal plans

and dividend reinvestment plans, you can systematically invest or withdraw funds

according to your needs and convenience.

Affordability :Investors individually may lack sufficient funds to invest in high-gradestocks. A mutual fund because of its large corpus allows even a small investor to take the

benefit of its investment strategy.

Choice of schemes: Mutual funds offer a family of schemes to suit your varying needs

over a lifetime

The power of compounding:Compounding is the financial equivalent of a snowball

rolling downhill. With each revolution, the snowball gets bigger because it picks up even

more snow every time around. Compounding produces a snowball effect with money

because the earnings each year contribute a little more to earnings the following year. As

time passes, the earnings contribute more and more to the total value of an investment.

The longer the period of an investment, the more one can accumulate, because of the

power of compounding which is why it makes sense to start investing early.

The secret is to start early For example:

Take Suresh and manoj. Suresh invests Rs. 5000 while manoj invests twice as much. As

illustrated in the table below, even though the amount invested by suresh is half of what

manoj puts, his investment final amount is becomes twice as much as manojs simply

because he started earlier a clear instance of the benefits of compounding. This is the

power of compounding.

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Compounding favors the early starter

Suresh Manoj

Investment amount Rs 5,000 Rs 10,000

Investment duration 20 years 10 years

Final amount Rs 81,833 Rs 40456

(Assumed annual rate of return 15% with dividends and capital gains reinvested. For

illustrative purposes only)

The key therefore lies in staring earlier, and giving ones investments a longer time to

grow.

Reinvest earnings and put money to work

You may have noticed that this example assumes that dividends and capital gains arent

taken in cash. Reinvesting distributions increases the value of a portfolio which, in turn,

increases the amount of interest earned each year.

Just like our snowfall growing larger with each roll, the value of the investment increases

by a greater amount each year as the earnings are put back in. as the time passes, earnings

generated by the reinvested interest can rival or surpass the earnings that come from the

initial investment alone. The longer, the better compounding works. Money starts

multiplying, more towards the end.

Growth on top of compounding

The basic principles of compounding apply to any mutual fund. Namely, reinvesting

earnings (dividend and capital gains for non-money market funds) over time can lead to

potentially large increases in value.

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If a funds share rises, initial investment grows independently of the effects of

compounding. Although theres no guarantee that a funds share price will increase,

coupling this kind of growth potential with compounding has been an effective strategy for

many long term investors.

Well regulated

All mutual funds are registered with SEBI and they function within the provisions of strict

regulations designed to protect the interest of investors. The operations of mutual funds are

regularly monitored by SEBI.

Disadvantages of Mutual Funds

Professional Management: Did you notice how we qualified the advantage of professional

management with the word "theoretically"? Many investors debate whether or not the so-

called professionals are any better than you or I at picking stocks. Management is by no

means infallible, and, even if the fund loses money, the manager still takes his/her cut..

Costs: Mutual funds don't exist solely to make your life easier - all funds are in it for a profit.

The mutual fund industry is masterful at burying costs under layers of jargon. These costs are

so complicated that in this tutorial we have devoted an entire section to the subject.

Dilution: It's possible to have too much diversification. Because funds have small holdings

in so many different companies, high returns from a few investments often don't make much

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

big. When money pours into funds that have had strong success, the manager often has

trouble finding a good investment for all the new money.

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-gains 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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Costs Involved In Mutual funds

An investor must know that there are certain costs involved while investing in mutual

funds. Mutual funds costs can be classified into 2 broad categories.

Operating expenses which are paid out of the funds earnings and

Sales charges : that are directly deducted from your investment. It is not compulsory that

every Mutual funds levy sales charges but they certainly have operating expenses. No

doubt they influence returns on investment in a fund.

Operating Expenses:These referred to cost incurred to operate a Mutual fund. Advisory

fees paid to investment managers, Audit fees to chartered accountant, custodial fees,

register and transfer agent fees, trustee fee, agent commission. Operating expenses also

known as expenses ratio, which is annual expenses, expressed as a percentage of the funds

average daily net assets mutual funds. The break up of these expenses is required to be

reported in the schemes offer document or prospectus.

Operating expenses

Expenses Ratio = ------------------------

Average Net Assets

For instance, if funds Rs. 100 crores and expenses 20 lakhs. Then the expenses ratio is

2%, expenses ratio is available in the offer document and from historical per unit statistics

included in the financial results of the fund, which are published by annually. Un-audited

for the half year ending September 30 and audited for the physically year end I march 30.

Depending upon scheme and net asset, operating expense are determined by limits

mandated by SEBI Mutual funds regulation Act. Any excess over specified limits as to be

born by Asset Management Company, the trustees or sponsors.

Sale Charges:

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There are known commonly sales loads, these are charged directly to investor. Sales loads

are used by mutual fund for the payment of agents commission, distribution and

marketing expenses. These charges have no effect on the performance of the scheme.

Sales loads are usually expression percentage and or of two types front-end and back-end.

Front-End Load:

It is a one time fixed fee paid by an investor when buying a Mutual funds scheme. It

determines public offer price which intern decides how much of your initial investment

actually get invested the standard practice of arriving a public offer price is as follows.

Net Asset Value

Public offer price = ------------------------

(1 front-end load)

Let us assume, An investor invests Rs. 10,000 in a scheme that charges a 2% front end

load at a NAV per unit Rs. 10 using the formula public offer price = 10/(1-0.02) is Rs.

10.20. So only 980 units are allotted to the investor

Amount invested

Number of units allotted = -------------------------

Public Offer Price

10,000/10.20 = 980 units at a NAV of Rs. 10

This means units worth 980 are allotted to him an initial investment of Rs. 10,000. Front-

end loads tend to decrease as initial investment amount increase.

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Exit Load:

May be a fixed fee redemption or a contingent deferred sales charges A redemption load

continues so long as the redeeming or selling of the units of the units of a fund does not

take place in the event of a back end load is applied. The redemption price is arrive are

using following formula.

Net Asset Value

Redemption price = --------------------------

(1 + back end load)

Let us assume an investor redeems units valued at Rs. 10,000 in a scheme that charges a

2% back end load at a NAV per units of Rs. 10 using the formula redemption price 10/(1 +

0.02) = Rs. 9.80. So, what the investor gets in hand is 9800 (9.8 x 1000).

For a subscription

NAV of a scheme X : Rs. 10

Entry load : 2%

POP : Rs. 10.20 [10*(1 +0.02}]

Amount invested : Rs. 10,000

Units allotted : 980.392 [10,000 /10.20]

For a Redemption

NAV of a scheme X : Rs 10

Entry load : 2%POP : Rs.9.8 [10*(1-0.02)]

Amount invested : Rs. 10,000

Units allotted : 1020.408 [10000 / 9.8]

Units are computed and denoted with a decimal precision.

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In addition to the standard load structure mentioned above, some schemes can have more

complex load structures often based on investment slabs, duration of investment etc. As a

general rule, as the investment value goes up, the load percentage tends to zero.

Contingent Deferred Sales Charges (CDSC):

Contingent deferred sales charges are a structured back end load. It is paid when the units

are redeemed during the initial years of ownership. It is for a pre-determined period only

and reduced over the time you invested for a fund. The longer the investor remains in a

fund the lower the CDSC.

The SEBI (Mutual fund regulation 1996) stipulate that a CDSC may be charge only for

first 4 years after purchase of units and also stipulate the maximum CDSC that can we

charge every year. The SEBI mutual funds regulation 1996 do not allow either the front

end load or back end load to any combination is higher than 7%.

Transaction Cost:

Some funds may also impose a switch over fee which is a charge on transfer of investment

from one scheme to another with in a same mutual funds family and also to switch from

one plan (short term) to another (long term) within same scheme.

Service Standard

Checks at the bank are compelled to compete the transaction in the timeliness mentioned.

This compulsion to compete transactions within timeliness is called service standard.

Similarly mutual funds also have service standards too.

It is usually measured as T + n

List of general service standards

Transaction Service standard

New purchases T+1

Additional purchases T+1

Redemptions in a liquid plan T day

Redemptions in non-liquid plan T+1

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Switches T+1

Non commercial transactions T+2

Dividends T+5

Role Of A Registrar

Primary role of a registrar in a mutual fund is to provide back office functions and provide a

accurate and timely service to investors, distributors and asset management companies.

Processing the following transactions is the main job of a registrar.

Commercial transactions

1. Noncommercial transactions

2. Special products

3. Special product features

4. Dividends

5. Brokerage

6. Banking reconciliation

7. Daily reporting to AMC

8. Various data feeds to banks, distributors.

9. Noncommercial transactions

10. Special products

11. Special product features

12. Dividends

13. Brokerage

14. Banking reconciliation

15. Daily reporting to AMC

16. Various data feeds to banks, distributors.

Objectives Of Equity Funds

Capital appreciation funds seek capital appreciation: dividends are not a primary

consideration

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Aggressive growth funds invest primarily in common stocks of small, growth

companies.

Growth funds invest primarily in common stock of well-established companies.

Sector funds investment primarily in companies in related fields.

Total return funds seek a combination of current income and capital appreciation.

Growth and income funds invest primarily in common stocks of established

companies with a potential for growth and a consistent record of dividend payments.

Income equity funds incest primarily in equity securities of companies with consistent

record of dividend payment they seek income more than capital appreciation.

World equity funds invest primarily in stocks of foreign companies. Emerging market funds invest primarily in companies based in developing regions of

the world.

Global equity funds invest primarily in equity securities traded worldwide, including

those of U.S.companies.

International equity funds invest primarily in equity securities of companies located

outside the United States.

Regional equity funds invest in companies based in a specific part of the world.

Asset Allocation: Considering the market trends, any prudent fund managers can change the

asset allocation i.e. he can invest higher or lower percentage of the fund in equity or debt

instruments compared to what is disclosed in the offer document. It can be done on a short

term basis on defensive considerations i.e. to protect the NAV. Hence the fund managers are

allowed certain flexibility in altering the asset allocation considering the interest of the

investors. In case the mutual fund wants to change the asset allocation on a permanent basis,

they are required to inform the unit holders and giving them option to exit the scheme at

prevailing NAV without any load.

Risk factors

Mutual Funds and securities investments are subject to market risks and there can be

no assurance that the objectives of the Mutual Fund will be achieved.

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As with any investment in securities, the NAV of the Units issued under the Scheme

can go up or down depending on the factors and forces affecting capital markets.

Past performance of the Sponsor / Investment Manager / Mutual Fund does not

indicate the future performance of the Scheme and may not necessarily provide a

basis of comparison with other investments.

The name of the Scheme do not in any manner, indicate either the quality of the

Scheme or its future prospects or returns.

The Sponsors are not responsible for any loss resulting from the operation of the

Scheme beyond the initial contribution of Rs.1, 00,000 towards setting up the Mutual

Fund.

The Mutual Fund is not guaranteeing or assuring any monthly/Quarterly dividend or

returns. The Mutual fund is also not assuring that it will make monthly/Quarterly

dividend distributions, though it has every intention of doing so. All dividend

distributions are subject to the investment performance of the scheme.

Trading volumes and settlement periods inherently restricts the liquidity of the

Schemes investments. In the event of an inordinately large number of redemptions or

of a restructuring of the Scheme's investment portfolio, there may be delays in the

redemption of units. Please refer section "Extraordinary Circumstances" and "Risk

Factors and Special Considerations".

Changes in Government Policy in general and changes in tax benefits applicable to

mutual funds may impact the returns to investors in the Scheme.

The NAVs may be affected by changes in the general market conditions, factors and

forces affecting capital market in particular, level of interest rates, various market

related factors, settlement periods and transfer procedures.

The Scheme may also invest in ADRs / GDRs as permitted by Reserve Bank of India

and Securities and Exchange Board of India. To the extent that some part of the assets of the

Scheme may be invested in securities denominated in foreign currencies, the Indian Rupee

equivalent of the net assets, distributions and income may be adversely affected by the

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changes in the value of certain foreign currencies relative to the Indian Rupee. The

repatriation of capital also may be hampered by changes in regulations concerning exchange

controls or political circumstances as well as the application to it of other restrictions on

investment.

A Unit holder may invest in the scheme and acquire a substantial portion of the scheme units.

The repurchase of units by the Unit holder may have an adverse impact on the units of the

scheme, because the timing of such repurchase may impact the ability of other Unit holders

to repurchase their units

Various types of benchmarks

Equity-oriented funds are usually benchmarked against the CNX Nifty, CNX Nifty Junior,

CNX 100, CNX 500 and CNX Midcap indices maintained by the NSE or against the

Sensex, BSE Midcap, BSE 100 or 200 maintained by the BSE.

Debt funds, Balanced funds and Monthly Income Plans are usually measured against either

benchmarks created by CRISIL or against blended (combinations of existing indices)

indices constructed by the fund house.

Are benchmarks best standards?

However, the stated benchmarks are not always the best standard for performance

evaluation as many a time funds take liberties while managing the fund. There are times

when the fund managers invest actively in stocks outside the benchmark, in order to

maximise their returns. At times, the fund may also invest in a class of stocks that are not

correctly reflected in the benchmark.

A fund supposed to invest in large-cap stocks (stocks with high market capitalisation)

may dabble in mid-cap or small-cap stocks, to improve returns. These investments entail

taking higher risk as mid-cap and small-cap stocks are subject to greater volatility

compared to large caps.

As the number of schemes in the market increases, fund houses have been coming out

with thematic schemes to attract investors. For example, if infrastructure stocks are the

flavour of the season, you see fund houses launching infrastructure funds. When you

compare their returns with the large-cap indices, they often deliver superlative returns. But

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the returns may not appear in such good light compared to a sector index such as the BSE

Capital Goods.

Benchmark comparisons also have to factor in how challenging the year has been for the

peer group. A fund may have outperformed the benchmark by a small margin when all its

peers have comfortably trounced the index. In such a case, out performance against thebenchmark may not be of much comfort to the investor.

Measuring Mutual Fund Performance

The investor would be interested in tracking the value of his investments, whether investing

directly in the markets or indirectly through mutual funds The investor would have to make

intelligent decisions whether to get an acceptable return on the investments in the funds

selected or to switch to another fund. The investor therefore needs to understand the basis of

performance measurement for the fund and acquire the basic knowledge of the different

measures of evaluating the performance of a fund. Only then investor would be in a position

to judge correctly whether the fund is performing well or not, and make right decisions.

Different Performance Measures

There are many measures of fund performance depending on the type of fund, the stated

investment objective of the fund and depending on the current financial conditions.

Change In NAV:

Purpose: If an investor wants to compute the return on investment between the two dates,

use the Per Unit Asset Value at the beginning and the end periods, and the change in the

value of the NAV between the two dates in the absolute ands percentage terms.

Formula: For NAV change in absolute terms

(NAV at the end of the period) (NAV at the beginning of the period).

For NAV Change in percentage terms

(Absolute change in NAV / NAV at the beginning) * 100

If period covered is less /more than one year

For annualized NAV change

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{[(Absolute change in NAV at the beginning)/months covered] * 12}* 100

Suitability: Investors to evaluate fund performance mostly use NAV change, and the

advantage of this measure is that it is easily understood and applies to virtually any type of

fund.Interpretation: Whether the return in terms of NAV growth is sufficient or not should be

interpreted in light of the investment objective of the fund, current market conditions and

alternative investment returns. Thus, a long-term growth fund or infrastructure fund will give

low returns in the initial years. All equity funds may give lower returns when the markets are

in a bearish phase. Debt funds may give lower returns when interest rates are rising.

Limitations: This measure does not always give the correct picture, in cases where the fund

has distributed to investors a significant amount of dividend in the interim period. Therefore

it is suitable for evaluating growth funds and accumulation plans of debt and equity funds,

but should be avoided for income funds and funds with withdrawal plans..

Total Return:

Purpose: This measure corrects the shortcoming of the NAV change, by taking account of

the dividends distributed by the fund between the two NAV dates, and adding them to NAV

change to arrive at the total return.

Formula:

Total return = [(Distributions + change in NAV) / NAV at the beginning of the period] * 100

Suitability: Total return is a measure suitable for all type of funds. Performance of different

types of funds can be compared on the basis of total return. Thus, during a given period, find

out whether a debt fund gave better returns than an equity fund. It is also more accurate than

simple NAV change, because it takes in to account distributions during the period. While

using total return, performance must be interpreted in the light of market conditions and

investment objective of the fund.

Limitations: Although more accurate than NAV change, simple total return as calculated is

still inadequate as a performance measure, because it ignores the fact that distributed

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dividends also get reinvested if received during the year. The investors total return should

take account of reinvestment of interim dividends.

Return On Investment Or Total Return With Dividends Reinvested At NavPurpose: The shortcoming of the simple total return is overcome by computing the total

return with reinvestment of dividends in the fund itself at the NAV on the date of distribution

(ex-dividend date). The appropriate measure of the growth of an investors mutual fund

holdings is, therefore the return on investment on accumulative basis over a certain time

period. Total return with reinvestment is such a measure of cumulative wealth accumulation,

and the same as ROI.

Formula: Total return on investment:

[{(Units held + div/ex-divNAV)*endNAV} begin NAV] /begin NAV * 100

Suitability: Total return with distributions reinvested at NAV is a measure accepted by

mutual fund tracking agencies such as Credence in Mumbai and Value research in New

Delhi. It is appropriate for measuring performance of accumulation plans, monthly/quarterly

income schemes and debt funds that distribute interim dividends.

Cumulative Aggregate Vs Average Annualized Returns

Purpose: While deploying any of the measures described above, it must be remembered that

absolute NAVs do not give a complete picture and that consistent performance with respect

to total return and compounded annual return is of paramount importance.

Many mutual fund schemes, notably from Unit Trust of India, are based on cumulative

returns over a long time period, e.g. Childrens Gift Growth Fund or Rajalaxmi Fund. When

an investor receives a cumulative figure at the end of a long period, care should be taken to

compute an annualized average compounded rate of return from the cumulative. Many

mutual funds present schemes with cumulative growth option or with dividend option.

Comparison between two such schemes is possible only after the cumulative returns are into

average annualized returns.

Formula: To convert cumulative return to average annualized return:

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The maturity value of an original investment will be

A=P*(1+R/100),

P = principal, A = maturity value of investment, N = period of investment in years,

R = annualized compounded rate in %

The growth in maturity value can be converted to average annualized return as follows:R = [(Nth root of A/P}]* 100

Effect Of Loads

The principal amount invested will be lower if there is an entry load charged by the fund.

Therefore investors return on amount invested has to be reduced by the initial load paid.

There would be two ways of accounting for the load.

One would be to reduce the compound rate of return by load % number of years.

A second and more accurate approach would be to reduce the % cumulative NAV

growth figure by the entry load paid.

a) Compare the same time periods

While computing these total returns, it is imperative to use the performance data over the

same time periods for two different funds being compared, as returns over different periods

vary due to market conditions prevalent then. This means only those funds for which

performance data are available during a given period for both of the funds being compared.

For less than one-year periods, it should not be annualized, except for money market mutual

funds, which have a short investment horizon.

b) Returns since inception

SEBI requires return to be computed since the inception of a scheme, using Rs. 10 as the

base amount. This method is correct as it is applied to no-loads funds. Otherwise an

adjustment for the loads paid has to be made as described above.

Expense Ratio

Purpose: The expense ratio is an indicator of the funds efficiency and cost effectiveness.

Formula: It is defined as the ratio of total expenses to average net assets of the fund.

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Suitability: SEBI Regulations regulate this aspect for funds in India, and it is important that

brokerage commissions on the funds transactions are not included in the fund expenses figure

while computing this ratio. The Expense ratio is most important in case of Bond Fund or

Debt Funds performance can be adversely affected if a larger proportion of it as income is

spent on expenses.

Limitations: though an important yardstick, fluctuations in the ratio across periods require

that an average over three to five years be used to judge a funds performance. Also, the

expense ratio must be evaluated in the light of fund size, average account size and portfolio

composition equity or fixed income.

Income Ratio

Formula: A funds income ratio is defined as its net investment income divided by its net

assets for the period.

Purpose/Suitability: This ratio is a useful measure for evaluating income-oriented funds

particularly debt-oriented funds. It is not recommended for funds that concentrate primarily

on capital appreciation.

Limitation: the income ration cannot be considered in isolation; it should be used only to

supplement the analysis based on the expense ratio and total return.

Portfolios Turn Over Rate

Purpose: the ratio measures how many times the fund manager turns over his port folio by

buying or selling of securities in the market. A 100%turnover implies that the manager

replaced his entire portfolio during the period in question

Formula: portfolio turn over rate measures the amount of buying and selling of securities

done by a fund. It defined as the lesser of assets purchased or sold divided by the funds net

assets.

Suitability: Turnover ratios would be most relevant to analyze in case of equity and

balanced funds, particularly those that derive a large part of their income from active trading.

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However, it would not be appropriate for equity funds with a value based, long term

investment philosophy, or even a growth fund.

Interpretation: This percentage is a good indicator of the extent to which the fund is active

in terms of its dealing on the market. However, high turn over ratio also indicates hightransaction costs charged to the fund. The net return to the investor can be lower with high

transaction costs.

Limitation: However, as a performance measure, this ratio is meaningful only when

evaluated against the backdrop of the funds investment objectives, and in terms of its ability

to perform well on a consistent basis. High turn over rate does not necessarily indicate

greater efficiency, and must be seen in relation to the total return of the investor. It is not

meaningful to use the turn over rate for newly launched schemes that are not fully invested.

In the Indian context, only the securities market turnover should be considered, excluding the

call money operations.

Transaction Costs

Definition: Transaction costs include all expenses related to trading such as the brokerage

commissions paid, stamp duty on transfers, registrars fees and custodians fees. Brokerage

commissions are an important component of transaction costs. These are quantified in the

prospectus. In addition, transaction costs include the so called dealer spreads. All securities

usually have a bid and an offer price. The fund sells securities at the bid price and buys them

at the offer price. The offer price is usually higher than the bid price and the difference is the

dealer spread, representing a cost to the fund investors. This spread may be further magnified

if a security is thinly traded and the fund wants to buy/sell a large quantity quickly.

Suitability: Transaction has a significant bearing on fund performance and its total return.

Funds with small size, or small returns, have to be judged on their expense ratios and

transaction costs, given their impact on total return.

Limitation: While other costs are detailed in the fund prospectus or annual reports, dealer

spreads are difficult to quantify or document.

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Fund SizeFund size can affect performance. Small funds are easier to maneuver and can achieve their

objectives in a focused manner with limited holdings. Large funds benefit from economies of

scale with lower expense ratios and superior fund management skills. They also gain through

greater risk bearing and management capacity. There can be no definition of what a small

fund and what a big fund, as small and big are relative terms. But, simply comparing the

corpus of two or more funds helps get a good fix on size.

Cash Holdings:

Definition: Mutual funds allocate their assets among equity shares, debt securities and

cash/bank deposits. The percentage of a funds portfolio held in cash equivalents can be

important element in its successful performance.

Interpretation: A large cash holdings allows the fund to strength its position in preferred

securities without liquidating its other portfolios. Cash also allows the fund a cushion against

decline in the market prices or bonds. The fund must also guard against large, consistent net

redemptions, because these not only indicate dissatisfaction on the part of investors, but also

force the fund to maintain large cash reserves lowering the return on the portfolio. It becomes

difficult for the fund to attain its objectives in such a situation

Borrowing By Mutual funds:

There are hedge funds that seek to enhance per unit earnings by borrowing, thereby

enhancing their fund size or corpus. The strategy holds well when interest costs is not very

high and fund performance is good. However if interest rates rise unexpectedly, or the value

of the portfolio declines significantly, the fund must reduce its dependence on debt quickly.

In general, in India, mutual funds are not allowed to borrow to increase their corpus. SEBI

Regulations allow mutual funds to borrow only for the purpose of meeting temporary needs

for a period not exceeding six months, and to the extent of 20% of its net assets. Hence it

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would be uncommon to see fund schemes with borrowings on their balance sheets, and if

borrowings are seen, caution may need to exercise in evaluating the fund performance.

EVALUATING FUND PERFORMANCE

Importance of Benching In Evaluating Performance:

The measures described earlier are absolute, meaning that none of the measures should be

used to evaluate the fund performance in isolation. A funds performance can only be judged

in relation to investors expectations. However, it is important for the investor to define his

expectations in relation to certain guide posts on what is possible to achieve, or moderate

his expectations with realistic investment alternatives available to him in the financial

markets. These guide posts or indicators of performance can be thought of as benchmarks

against which a funds performance ought to be judged. For example, an investors

expectations of returns from an equity fund should be judged against how the overall stock

market performed, in other words how much the stock market index itself moved up or

down, and whether the fund gave a return that was better or worse than the index movement.

In this example, we can use a market index like S&P CNX Nifty or BSE SENSEX as

benchmarks to evaluate our investors mutual fund performance.

While an advisor needs to look at the absolute measures of performance, he needs to select

the right benchmark to evaluate a funds performance, so that he can compare the measured

performance figures against the selected benchmark. How do we select the right benchmark

to evaluate a given funds performance?

Historically in India, investors only options were UTI schemes or bank deposits. UTI itself

tended to benchmark its returns against what interest rates were available on bank deposits

of 3/5-year maturity. Thus, for long period, US 64 scheme dividends were compared to bank

interest rate and investors would be happy if the dividend yield on US 64 units was greater

than comparable deposit interest rate. Thus, investors in Indian mutual funds tend to

routinely compare bank interest rates with returns on mutual fund schemes. However, with

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increasing investment options in the market, bank interest rates should not be used to judge a

mutual funds performance in all cases. Let us therefore take a look at how to choose the

correct benchmarks of mutual fund performance.

Basis of choosing an appropriate performance benchmark:

Appropriate benchmark for any fund has to be selected by reference to:1. The asset class it invests in.

thus, an equity fund has to be judged by an appropriate benchmark from the equity markets,

a debt fund performance against a debt market benchmark and so on; and

2. The funds stated investment objective:

for example, if a fund invests in long-term growth stocks, its performance ought to be

evaluated against a benchmark that captures growth stocks performance.

There are in fact three types of benchmarks that can be used to evaluate a funds

performance, relative to the market as a whole, relative to other mutual funds, and relative to

other comparable financial products or investment options open to the investor.

Benchmarking Relative To The Market-Equity Index

Index funds-a base index: If an investor to choose an equity index fund, now being offered

in India, he can expect to get the same return on his investment as the return on the equity

index used by the fund as its benchmark, called the base index. this is a passive investment

style. The fund would invest in the index stocks. And expect its NAV changes to mirror the

changes in the index itself. The fund and therefore the investor would not expect to beat the

benchmark, but merely earn the same return as the index.

In the case of index funds, then, the benchmark is clear and pre-specified by the fund

manager in advance. For example, IDBI mutual funds index fund is based on and will track

the S&P CNX Nifty index, while UTIS fund is based on BSE SENSEX Index

Tracking error: In order to obtain the same returns as the index, an index fund invests in all

of the stocks include in the index calculation, in the same proportion as the stocks weightage

in the index .an index funds actual return may, however, be better or worse by what is called

tracking error the tracking error arises from the practical difficulties faced by the fund

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manager in trying to always buy or sell stocks to remain in line with the weightage that the

stocks enjoy in the index.

Active equity funds: An Index Fund is passively managed, to track a given index. However,

the fund managers actively manage most of the other equity funds/schemes. If an investorholds such an actively managed equity fund, the fund manager would not specify in advance

the benchmark to evaluate his expected performance as in case of an index fund. However,

the investor still needs to know whether the fund performance is good or bad. To evaluate the

performance of an equity fund, therefore we still need to select an appropriate benchmark

and compare its returns to the returns on benchmark: usually this means using the appropriate

market index. The appropriate index to be used to evaluate a broad-based equity fund should

be decided on the basis of the size and the composition of the funds portfolio.

If the fund in question has a large portfolio, a broader market index like BSE 100 OR 200

OR NSE 100 may have to be used as the benchmark rather than S&P CNX NIFTY OR

BSE30 .An actively managed fund expects to be able to beat the index, in other words give

higher returns than the index itself.

Somewhat like the index funds, the choice of the benchmarks in case of sector funds is

easier. Clearly, for example, an investor in InfoTech or Pharma sector funds can only expect

the same return as the relative sectoral indices. In such case he should expect the same or

higher returns than an InfoTech or Pharma sector index if such an index exists. In other

words, the choice of the correct equity indexes as a benchmark also depends upon the

investment objective of the fund. the performance of a small cap fund has to be compared

with a small cap index. A growth fund investing in new growth sectors but is diversified in

many sectors can only be judged against the appropriate growth index if available. If not, the

returns can only be compared to either a broad-based index or a combined set of sectoral

indices

Choosing market benchmarks in practice: The best alternative in practice for the investor

and his advisor is to rely on the expert performance tracking agency reports and analyses,

since the choice of appropriate benchmark can become a difficult technical exercise.

In India, benchmarking for retail investors is done using a menu of indices in combination.

Agencies such as credence prefer the BSE200 because of its broad-based nature. For sector

funds, the S&P CNX Sectoral indices have been preferred. Choice of an appropriate index

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from the ones available is critical. The investor or his advisor would do well to refer to India

Index Services Limited for more details of the indices available and the past performance

data, similar information can be obtained from the Index Services Divisions of the BSE or

other exchanges.

Debt Funds: As we have seen, historically investors have used bank deposit interest rates as

benchmarks to judge the performance of debt funds. However, a debt funds performance

ought to be judged against a debt market index, just as an equity funds benchmark would be

judged against the equity market index. Further, for debt funds, the kind of debt that

comprises the portfolio will also decide the index to be used. If the bond fund in question is

abroad based one, and then a broad-based debt index has to be used for this purpose. If the

debt fund is a narrowerGovernment Securities Fund, for example, then only the govt. sec.

sub segment of the broad based index has to be used as the appropriate benchmark. Investors

in India commonly do performance of closed end debt funds with a clear period of maturity

however may be compared with bank deposits of comparable maturity, as.

In practice, no appropriate debt index is available in India, to be used for benchmarking debt

funds. Some analysts often use I-SECS I-BEX index, and its govt.securities sub segment can

be used as benchmark to judge govt.sec.funds. in any case, any benchmark for a debt must

have the same portfolio composition and the same maturity profile as the fund itself, to be

comparable.

Risk Of The Mutual Fund Portfolio

Pursuing greater than average return generally means assuming high risk. Since investment

risk is defined as variability of investment return, portfolios with above-average return

potential are subject to above average swing in value relating to stock market as a whole.

These portfolios beat the market, far behind when rising, but drop faster than the market fall.

The risk taking investors tend to re-structure their portfolio in a manner that the constituent

of growth securities is increased to un proportionate level, forgetting that market would dip

suddenly.

Risks in mutual funds holdings

For diversified portfolios, such as common stock mutual funds, beta provides a useful index

of investment risk. Simply stated, beta measures portfolio risk in relation to the

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riskiness of the market risk. The trade off between investment risk and investment return

is known as the capital market line. The upward sloping of this line represents the

combinations of risk and return found in well-diversified portfolios of common stocks.

The return potential of a diversified common stock portfolio can be obtained by applying the

following mathematical statement of the capital line,Portfolio Return = Risk Free Return + Beta (Market Return Risk Free Return}

The risk free rate of return is approximated by the yield on short-term treasury bills while the

market return (MR) is usually taken as the total rate of return on the market index.

Beta measures how one security, or group of stocks, would likely to fare relatively to the

stock market as a whole. A mutual fund where beta = 1.0 is most likely to go up or down as

much as stock market as whole i.e. with the market movement, the portfolio of a mutual fund

is perfectly co-related. One with a beta more than 1.0 the portfolio price would be more

volatile and likely to go up and down more e.g. if beta =1.6, the movement of portfolio

would go up and down by 60% more than the corresponding movement of the stock market.

A beta lowers than 1.0 tends to react less than the market reaction. A negative beta is the

symbol of movement in opposite direction. If market grows upwards, then the portfolio

movement would be downwards and vice-versa. Although beta cannot predict direction of

the marketgoing upward or downward, stable, it is an excellent indicator of the

responsiveness of a portfolio value, given changes in stock market as a whole.

Risk Exposure

Many individual inventors define investment success as beating the market, or in other

word, earning above- average returns. But these investors often forget that they are pursuing

greater-than-average risk also. Since investment risk is defined as variability of investment

return, portfolio with above average return potential are subject to above average swings in

value relative to the stock market as a whole.

These portfolios far-out pace the market when the market is rising but drop faster than the

market when the market falls. However, when stock prices are rising, investors tend to forget

about the negative aspects of holding a high-risk portfolio because they are beating the

market. In fact it has been found that as long as stock prices continue t rise, investors tend to

increase the risk of their portfolios in pursuit of grater and greater investment rewards. These

investors are generally shaken by the size of their losses when the stock market takes a

sudden dip.

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An astute investment management requires that individuals continually monitor the riskiness

of their investment portfolios. They must periodically ask themselves if the current level of

portfolio risk is consis