STUDY ON PERFORMANCE OF SELECTED MUTUAL FUND SCHEMES Surana College P.G Centre -1- Harsha .B.N A Dissertation Report on ‘A STUDY ON PERFORMANCE OF SELECTED MUTUAL FUND SCHEMES.’ Submitted In partial fulfillment of the requirement of award of Master of Business Administration Submitted By B.N. HARSHA Reg No: 08KXCM6065 Under the guidance of Mrs. Poornima.S Bangalore University SURANA COLLEGE CENTRE FOR POST GRADUATE STUDIES #17, Kengeri Satellite Town Bangalore-60
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STUDY ON PERFORMANCE OF SELECTED MUTUAL FUND SCHEMES
Surana College P.G Centre -1- Harsha .B.N
A Dissertation Report on
‘A STUDY ON PERFORMANCE
OF SELECTED MUTUAL FUND SCHEMES.’
Submitted
In partial fulfillment of the requirement
of award of
Master of Business Administration
Submitted By
B.N. HARSHA
Reg No: 08KXCM6065
Under the guidance of
Mrs. Poornima.S
Bangalore University
SURANA COLLEGE CENTRE FOR POST GRADUATE STUDIES
#17, Kengeri Satellite Town
Bangalore-60
STUDY ON PERFORMANCE OF SELECTED MUTUAL FUND SCHEMES
Surana College P.G Centre -2- Harsha .B.N
Declaration
I BN. Harsha bearing Reg No 08KXCM6065 do hereby declare that
the Project entitled „A Study on the Performance Analysis of Selected
Mutual Funds‟ is an original work carried out by me under the
guidance of Mrs. Poornima.S and has not been presented earlier for
any other University for the award of degree in “Master of Business
Administration” of Bangalore University.
Place: Bangalore B.N HARSHA
Date: (08KXCM6065)
STUDY ON PERFORMANCE OF SELECTED MUTUAL FUND SCHEMES
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ACKNOWLEDGEMENT
The successful accomplishment of any task is incomplete without
acknowledging the contributing personalities who both assisted and inspired
and lead us to way of success.
I thank our Director Dr. V. Prabhu Dev for giving us an opportunity to undertake
the dissertation in our area of interest and discover our true potential while
undertaking this project.
My sincere thanks to Mrs. Poornima.S, my guide for this project to whom I am
deeply grateful and highly indebted for the constant support and guidance
without which it would not have been possible for me to complete this project.
I would also like to thank Mr. Manavzhagan for contributing a lot of insights and
providing me constant support.
Last but not the least I thank my dearest PARENTS, FRIENDS for their
continued support.
I would also like to thank all those who contributed to this project in any manner.
Place: Bangalore B.N. HARSHA
Date:
STUDY ON PERFORMANCE OF SELECTED MUTUAL FUND SCHEMES
Surana College P.G Centre -4- Harsha .B.N
EXECUTIVE SUMMARY
This project is about studying and analyzing the performance of a few selected mutual fund
schemes. Today an investor is interested in tracking the value of his investments, whether
invested directly in the market or indirectly through Mutual Funds. This dynamic change has
taken place because of a number of reasons. With globalization and the growing competition
in the investments opportunity available he would have to make guided and rational decisions
on whether he gets an acceptable return on his investments in the funds selected by him, or if
he needs to switch to another fund.
In order to achieve such an end the investor has to understand the basis of appropriate
preference measurement for the fund, and acquire the basic knowledge of the different
measures of evaluating the performance of the fund. Only then would he be in a position to
judge correctly whether his fund is performing well or not, and make the right decision.
The main objective of this study is to analyze the performance of the mutual fund schemes in
terms of risk and return. The report deals with a comparative study of ten selected balanced
mutual fund schemes of different AMC‟s. The study is based on data collected for a period of
one year.
The funds have also been ranked according to the three different performance measures
which are Sharpe‟s Ratio, Tenor‟s Ratio and Jensen‟s Measure.
Reliance Regular Savings Balanced Fund has outperformed all the other funds, as it has
yielded the highest return.
Birla Sun Life 95 Fund has the lowest risk among all the selected funds, as it has the lowest
Beta among all the funds.
Franklin Templeton India Balanced Fund has delivered more consistent returns, as it has the
lowest Standard Deviation.
In terms of size UTI Balanced Fund is the largest fund, as it has Net Assets of Rs. 1057.19
crore, which is the highest among all the selected funds.
Comparing the overall performance of all the selected mutual fund schemes, HDFC Balanced
Fund has been the best mutual fund scheme, as it has the best ranking as per both Sharpe &
Treynor and also the second ranking according to Jensen‟s measure.
STUDY ON PERFORMANCE OF SELECTED MUTUAL FUND SCHEMES
Surana College P.G Centre -5- Harsha .B.N
1
2
3
4
5
6
Introduction
Research Design
Industry Profile & Company Profile
Data Analysis & Interpretation
Findings, Conclusions & Suggestions
Bibliography
Annexure
01-17
18-25
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57-69
70-72
73
74-83
Sl. NO Particulars Page Number
TTaabbllee ooff CCoonntteennttss
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Sl. NO Particulars Page Number
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2
3
4
5
6
Showing Returns of the Funds
Showing Beta of the Funds
Showing Standard Deviation of the Funds
Showing Sharpe‟s Ratio of the Funds
Showing Treynor‟s Ratio of the Funds
Showing Jensen‟s Measure of the Funds
57
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LLiisstt ooff TTaabblleess
STUDY ON PERFORMANCE OF SELECTED MUTUAL FUND SCHEMES
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LLiisstt ooff GGrraapphhss
Sl. NO Particulars Page Number
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2
3
4
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7
Showing Growth in AUM
Showing Returns of the Funds
Showing Beta of the Funds
Showing Standard Deviation of the Funds
Showing Sharpe‟s Ratio of the Funds
Showing Treynor‟s Ratio of the Funds
Showing Jensen‟s Measure of the Funds
07
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STUDY ON PERFORMANCE OF SELECTED MUTUAL FUND SCHEMES
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CHAPTER-1
INTRODUCTION
STUDY ON PERFORMANCE OF SELECTED MUTUAL FUND SCHEMES
Surana College P.G Centre -9- Harsha .B.N
CHAPTER-1
INTRODUCTION
Investment refers to the process of commitment of funds with the objective of earning
additional income or capital appreciation or both.
Savings form an important part of the economy of any nation. With savings invested in
various options available to the people, the money acts as the driver for growth of the
country. Indian financial scene too presents multiple avenues to he investors. Though
certainly not the best or deepest of markets in the world, it has ignited the growth rate in
mutual fund industry to provide reasonable options for an ordinary man to invest his savings.
Investment goals vary from person to person. While somebody wants security, others might
give more weightage to returns alone. Somebody else might want to plan for his child‟s
education while somebody might be saving for life after retirement. With objectives defying
any range, it is obvious that the products required will vary as well. Today an investor has a
lot of investment alternatives to choose from in the market such as shares, debentures, mutual
funds, Government securities etc.
The investor has to make a wise choice keeping in mind various factors such as objective of
investment, risk associated with the investment, tax benefits, liquidity, marketability etc.
But it is not an easy task for the investor to identify the right avenue for investment due to
many investment constraints such as lack of resources and time to conduct research etc.
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 according to the fund‟s objectives. The income
earned through these investments and the capital appreciations realized are shared by its unit
holders in proportion to the number of units owned by them. Thus a 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 one investment vehicle that has truly come of age in India in the past decade is mutual
funds. Today, the mutual fund industry in the country manages around Rs 7, 81,583.84 crore
(As of Feb, 2010) of assets, a large part of which comes from retail investors. And this
amount is invested not just in equities, but also in the entire gamut of debt instruments.
STUDY ON PERFORMANCE OF SELECTED MUTUAL FUND SCHEMES
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Mutual funds have emerged as a proxy for investing in avenues that are out of reach of most
retail investors, particularly government securities and money market instruments.
Specialization is the order of the day, be it with regard to a scheme‟s investment objective or
its targeted investment universe. Given the plethora of options on hand and the hard-sell
adopted by mutual funds vying for a piece of your savings, finding the right scheme can
sometimes seem a bit daunting. Mind you, it‟s not just about going with the fund that gives
you the highest returns. It‟s also about managing risk–finding funds that suit your risk
appetite and investment needs.
Concept of a Mutual Fund
The securities and exchange board of India regulations.1993 defines a mutual fund as “a fund
established in the form of a trust by a sponsor, to raise monies by the trustees through the sale
of units to the public, under one or more schemes, for investing in securities in accordance
with these regulations”.
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:-
STUDY ON PERFORMANCE OF SELECTED MUTUAL FUND SCHEMES
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A Mutual Fund is a body corporate registered with the Securities and Exchange Board of
India (SEBI) that pools up the money from individual/corporate investors and invests the
same on behalf of the investors/unit holders, in Equity shares, Government securities,
Bonds, Call Money Markets etc, and distributes the profits. In the other words, a Mutual
Fund allows investors to indirectly take a position in a basket of assets.
Mutual Fund is a mechanism for pooling the resources by issuing units to the investors and
investing funds in securities in accordance with objectives as disclosed in offer document.
Investments in securities are spread among a wide cross-section of industries and sectors
thus the risk is reduced. Diversification reduces the risk because all stocks may not move in
the same direction in the same proportion at same time. Investors of 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
which are launched from time to time. A Mutual Fund is required to be registered with
Securities Exchange Board of India (SEBI) which regulates securities markets before it can
collect funds from the public.
Investors earn from a Mutual Fund in three ways:
1. Income is earned from dividends declared by mutual fund schemes from time to time.
2. If the fund sells securities that have increased in price, the fund has a capital gain.
This is reflected in the price of each unit. When investors sell these units at prices
higher than their purchase price, they stand to make a gain.
3. If fund holdings increase in price but are not sold by the fund manager, the fund's unit
price increases, the mutual fund units can be sold for a profit. This is amounts to a
valuation gain.
Though still at a nascent stage, Indian MF industry offers a plethora of schemes and serves
broadly all type of investors. The range of products includes equity funds, debt, liquid, gilt
and balanced funds. There are also funds meant exclusively for young and old, small and
large investors. Moreover, the setup of a legal structure, which has enough teeth to safeguard
investors‟ interest, ensures that the investors are not cheated out of their hard-earned money.
STUDY ON PERFORMANCE OF SELECTED MUTUAL FUND SCHEMES
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All in all, benefits provided by them cut across the boundaries of investor category and thus
create for them, a universal appeal.
Investors of all categories could choose to invest on their own in multiple options but opt for
mutual funds for the sole reason that all benefits come in a package.
History of Mutual Funds in India
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. The history of mutual funds in
India can be broadly divided into four distinct phases
First Phase – 1964-87:
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by
the Reserve Bank of India and functioned under the Regulatory and administrative control of
the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial
Development Bank of India (IDBI) took over the regulatory and administrative control in
place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988
UTI had Rs.6, 700 crores of assets under management.
Second Phase – 1987-1993 (Entry of Public Sector Funds):
The year 1987 marked the entry of non- UTI, public sector mutual funds set up by public
sector banks and Life Insurance Corporation of India (LIC) and General Insurance
Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund
established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank
Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of
Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had
set up its mutual fund in December 1990.
At the end of 1993, the mutual fund industry had assets under management of Rs.47,004
crores.
STUDY ON PERFORMANCE OF SELECTED MUTUAL FUND SCHEMES
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Third Phase – 1993-2003 (Entry of Private Sector Funds):
With the entry of private sector funds in 1993, a new era started in the Indian 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 registered and governed. The erstwhile Kothari Pioneer (now merged
with Franklin Templeton) was the first private sector mutual fund registered in July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and
revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI
(Mutual Fund) Regulations 1996.
The number of mutual fund houses went on increasing, with many foreign mutual funds
setting up funds in India and also the industry has witnessed several mergers and acquisitions.
As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805
crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way
ahead of other mutual funds.
Fourth Phase – Since February 2003:
In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was
bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of
India with assets under management of Rs.29,835 crores as at the end of January 2003,
representing broadly, the assets of US 64 scheme, assured return and certain other schemes.
The Specified Undertaking of Unit Trust of India, functioning under an administrator and
under the rules framed by Government of India and does not come under the purview of the
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 Fund Regulations. With the bifurcation
of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under
management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual
Fund Regulations, and with recent mergers taking place among different private sector funds,
the mutual fund 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.153108 crores
under 421 schemes.
STUDY ON PERFORMANCE OF SELECTED MUTUAL FUND SCHEMES
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Fifth Phase – Growth and Consolidation - 2004 Onwards
The industry has also witnessed several mergers and acquisitions recently, examples of which
are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual
Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international
mutual fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc.
There were 33funds as at the end of March 2010. This is a continuing phase of growth of the
industry through consolidation and entry of new international and private sector players.
Graph-1: Showing Growth in AUM.
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Organization 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 sponsor of a mutual fund is like the promoter of a company. The sponsor may be a bank,
a financial institution, or a financial service company. The sponsor is responsible for setting
up and establishing the mutual fund.
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 unit holders.
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.
STUDY ON PERFORMANCE OF SELECTED MUTUAL FUND SCHEMES
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Association of Mutual Funds in India (AMFI)
With the increase in mutual fund players in India, a need for mutual fund association in India
was generated to function as a non-profit organization. Association of Mutual Funds in India
(AMFI) was incorporated on 22nd August, 1995.AMFI is an apex body of all Asset
Management Companies (AMC) which has been registered with SEBI. Till date all the
AMCs are that have launched mutual fund schemes are its members. It functions under the
supervision and guidelines of its Board of Directors.
The Association of Mutual Funds of India works with 30 registered AMCs of the country.
Association of Mutual Funds India has brought down the Indian Mutual Fund Industry to a
professional and healthy market with ethical lines enhancing and maintaining standards. It
follows the principle of both protecting and promoting the interests of mutual funds as well as
their unit holders.
The objectives of Association of Mutual Funds in India are as follows:-
To define and maintain high professional and ethical standards in all areas of
operation of mutual fund industry
To recommend and promote best business practices and code of conduct to be
followed by members and others engaged in the activities of mutual fund and asset
management including agencies connected or involved in the field of capital markets
and financial services.
To interact with the Securities and Exchange Board of India (SEBI) and to represent
to SEBI on all matters concerning the mutual fund industry.
To represent./t to the Government, Reserve Bank of India and other bodies on all
matters relating to the Mutual Fund Industry.
To develop a cadre of well trained Agent distributors and to implement a programme
of training and certification for all intermediaries and other engaged in the industry.
To undertake nationwide investor awareness programme so as to promote proper
understanding of the concept and working of mutual funds.
To disseminate information on Mutual Fund Industry and to undertake studies and
research directly and/or in association with other bodies.
At last but not the least association of mutual fund of India also disseminate
information on Mutual Fund Industry and undertakes studies and research either
directly or in association with other bodies.
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The members of AMFI:
Bank Sponsored
SBI Fund Management Ltd.
BOB Asset Management Co. Ltd.
Canbank Investment Management Services Ltd.
UTI Asset Management Company Pvt. Ltd.
Institutions -
Jeevan Bima Sahayog Asset Management Co. Ltd.
Private Sector: -
Indian -
Benchmark Asset Management Co. Pvt. Ltd.
Cholamandalam Asset Management Co. Ltd.
Credit Capital Asset Management Co. Ltd.
Escorts Asset Management Ltd.
JM Financial Mutual Fund
Kotak Mahindra Asset Management Co. Ltd.
Reliance Capital Asset Management Ltd.
Sahara Asset Management Co. Pvt. Ltd
Sundaram Asset Management Company Ltd.
Tata Asset Management Private Ltd.
Predominantly India Joint Ventures:-
Birla Sun Life Asset Management Co. Ltd.
DSP Merrill Lynch Fund Managers Limited
HDFC Asset Management Company Ltd.
Predominantly Foreign Joint Ventures:-
ABN AMRO Asset Management (I) Ltd.
Alliance Capital Asset Management (India) Pvt. Ltd.
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Deutsche Asset Management (India) Pvt. Ltd.
Fidelity Fund Management Private Limited
Franklin Templeton Asset Mgmt. (India) Pvt. Ltd.
HSBC Asset Management (India) Private Ltd.
ING Investment Management (India) Pvt. Ltd.
Morgan Stanley Investment Management Pvt. Ltd.
Principal Asset Management Co. Pvt. Ltd.
Prudential ICICI Asset Management Co. Ltd.
Standard Chartered Asset Mgmt Co. Pvt. Ltd.
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Advantages of Mutual Funds:
1. Professional Management: Mutual Funds provide the services of experienced and
skilled professionals, backed by a dedicated investment research team that analyses
the performance and prospects of companies and selects suitable investments to
achieve the objectives of the scheme.
2. 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 same 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.
3. Convenient Administration: Investing in a Mutual Fund reduces paperwork and
helps you avoid many problems such as bad deliveries, delayed payments and follow
up with brokers and companies. Mutual Funds save your time and make investing
easy and convenient.
4. 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.
5. 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.
6. Liquidity: In open-end schemes, the investor gets 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 the Mutual Fund.
7. 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 manager's investment strategy
and outlook.
8. 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.
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9. Affordability: Investors individually may lack sufficient funds to invest in high-grade
stocks. A mutual fund because of its large corpus allows even a small investor to take
the benefit of its investment strategy.
10. Well Regulated: All Mutual Funds are registered with SEBI and they function within
the provisions of strict regulations designed to protect the interests of investors. The
operations of Mutual Funds are regularly monitored by SEBI.
Drawbacks of Mutual Funds:
1. No Guarantees: The return of any mutual fund scheme is not assured as the
investment or the corpus of the fund is invested in the capital market which may or
may not generate returns. No investment is risk free, if the entire stock market
declines in value, the value of mutual fund shares will go down as well, no matter
how balanced the portfolio is but investors encounter fewer risks when they invest in
mutual funds than when they buy and sell stocks on their own.
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. Fees and commissions: All funds charge administrative fees to cover their day-to-
day expenses. Some funds also charge sales commissions or "loads" to compensate
brokers, financial consultants, or financial planners. Even if an investor doesn't uses a
broker or other financial adviser, he will pay a sales commission if he buys shares in a
Load Fund.
4. Taxes: During a typical year, most actively managed mutual funds sell anywhere
from 20 to 70 percent of the securities in their portfolios. If a fund makes a profit on
its sales, the investor will pay taxes on the income he receives, even if he reinvests the
money he made.
5. Management risk: When an investor invests in a mutual fund, he depends on the
fund's manager to make the right decisions regarding the fund's portfolio. If the
manager does not perform as well as he had hoped, he might not make as much
money on his investment as he had expected. Of course, if the investor invests in the
Index Funds, he foregoes management risk, because these funds do not employ
managers.
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TYPES OF MUTUAL FUNDS
BY STRUCTURE
Open - Ended Schemes
Close - Ended Schemes
Interval Schemes
BY NATURE
Equity Fund
Debt Funds
Balanced Funds
BY INVESTMENT OBJECTIVE
Growth Schemes
Income Schemes
Balanced Schemes
Money Market Schemes
OTHER SCHEMES
Tax Saving Schemes
Index Schemes
Sector Specific Schemes
Different types of mutual fund schemes:
By Structure-
1. Open-end Funds: An open-end fund is one that is available for subscription all
through the year. These funds do not have a fixed maturity and investors can
conveniently buy and sell its units at Net Asset Value ("NAV") related prices. The
key feature of open-end schemes is its liquidity.
2. Closed-end Funds: 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 and investors can invest in the scheme only 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.
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3. Interval Funds: Interval funds 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
1. Growth/Equity Oriented Funds: The aim of growth funds is to provide capital
appreciation over a period of time usually medium to long term. Such schemes
normally invest a majority of their corpus in equities. It has been proved that returns
from stocks, have outperformed most other kind of investments held over the long
term. Growth schemes are ideal for investors having a long term outlook seeking
growth over a period of time.
2. Income/ Debt oriented Funds: The aim of income funds is to provide regular and
steady income to investors. Such schemes generally invest in fixed income securities
such as bonds, corporate debentures and Government securities. Income Funds are
ideal for capital stability and regular income.
3. Balanced Funds: 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.
4. Money Market/Liquid Funds: 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.
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Other Schemes
1. Tax Saving Schemes: These schemes offer tax rebates to the investors under specific
provisions of the Indian Income Tax laws as the Government offers tax incentives for
investment in specified avenues. Investments made in Equity Linked Savings
Schemes (ELSS) and Pension Schemes are allowed as deduction u/s 88 of the Income
Tax Act, 1961. The Act also provides opportunities to investors to save capital gains
u/s 54EA and 54EB by investing in Mutual Funds.
2. Industry Specific Schemes: 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, Pharmaceuticals, etc…
3. Index Funds: The corpus of the Index Fund is invested in the index stocks and it
attempt to replicate the performance of a particular index such as the BSE Sensex or
the NSE Nifty.
4. Gilt Funds: These funds invest exclusively in Government securities. Government
securities have no default risk. NAV‟s of these funds also fluctuate due to interest
rate changes and other economic factors as is the case with income or debt oriented
schemes.
5. Sectoral Funds: Sectoral Funds are those which invest exclusively in a specified
sector. This could be an industry or a group of industries or various segments such as
'A' Group shares or initial public offerings.
6. Load Funds:
A Load Fund is one that charges a commission for entry or exit. That is, each time
you buy or sell units in the fund, a commission will be payable. Typically entry and
exit loads range from 1% to 2%. It could be worth paying the load, if the fund has a
good performance history.
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7. No-Load Funds:
A No-Load Fund is one that does not charge a commission for entry or exit. That is,
no commission is payable on purchase or sale of units in the fund. The advantage of a
no load fund is that the entire corpus is put to work.
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 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.
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RISKS ASSOCIATED WITH MUTUAL FUNDS:-
Investing in Mutual Funds, as with any security, does not come without risk. One of the most
basic economic principles is that risk and reward are directly correlated. In other words, the
greater the potential risk the greater the potential return. The types of risk commonly
associated with Mutual Funds are:
1) MARKET RISK- Market risk relates to the market value of a security in the future.
Market prices fluctuate and are susceptible to economic and financial trends, supply
and demand, and many other factors that cannot be precisely predicted or controlled.
2) POLITICAL RISK- Changes in the tax laws, trade regulations, administered prices,
etc are some of the many political factors that create market risk. Although
collectively, as citizens, we have indirect control through the power of our vote
individually, as investors, we have virtually no control.
3) INFLATION RISK- Interest rate risk relates to future changes in interest rates. For
instance, if an investor invests in a long-term debt Mutual Fund scheme and interest
rates increase, the NAV of the scheme will fall because the scheme will be end up
holding debt offering lower interest rates.
4) BUSINESS RISK- Business risk is the uncertainty concerning the future existence,
stability, and profitability of the issuer of the security. Business risk is inherent in all
business ventures. The future financial stability of a company cannot be predicted or
guaranteed, nor can the price of its securities. Adverse changes in business
circumstances will reduce the market price of the company‟s equity resulting in
proportionate fall in the NAV of the Mutual Fund scheme, which has invested in the
equity of such a company.
5) ECONOMIC RISK- Economic risk involves uncertainty in the economy, which, in
turn, can have an adverse effect on a company‟s business. For instance, if monsoons
fail in a year, equity stocks of agriculture-based companies will fall and NAVs of
Mutual Funds, which have invested in such stocks, will fall proportionately.
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CHAPTER-2
RESEARCH
DESIGN
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CHAPTER-2
RESEARCH DESIGN
Background of the Study:
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 objective of the scheme. These could range from shares to
debentures to money market instruments. The income earned through these investments and
the capital appreciation realized by the scheme are 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
portfolio at a relatively low cost. Each Mutual Fund scheme has a defined investment
objective and strategy.
This study is therefore aimed at comparing the performance of selected mutual fund schemes.
Statement of the Problem:
There are various investment avenues available to an investor today. The stock market is
volatile and therefore selecting the right & profitable investment is a real challenge to the
investor. A mutual fund diversifies the risk associated with the investments. But selecting the
right mutual fund is a real challenge as each fund has a specific objective.
Therefore this study aims at identifying the right mutual fund schemes for investment with
regard to returns & performance.
Objectives of the Study:
To understand the working & management of a Mutual Fund.
To understand the calculation of Net- Asset Values of mutual funds.
To evaluate investment performance of mutual funds in terms of risk and return.
To get an insight knowledge about mutual funds.
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SCOPE OF THE STUDY:
Even today investing in mutual funds is a little difficult for laymen. Today in India there are
more than 800 mutual fund schemes. This is sufficed to baffle the investor. Researches have
shown that funds picked are those that advertise heavily and sell aggressively.
Studies have proved that an investor who analyses and make sense of his investment needs
and making the movements according to it could enable the investor to win the game. Hence,
a thorough understanding of the functionalities and the factors which contributes to the return
will help the investor to make more sensible movements rather, to be just cajoled by the
advertisements and selling spree.
Here lies the need of this study, to provide a solid understanding about the different factors
governing the return. For easy understanding and to provide more easy explanation a case of
five randomly chosen AMCs are done.
Hypothesis-
H0: Investment in Mutual Funds is beneficial and profitable.
Sampling Design:
The samples consist of 10 mutual funds schemes selected, five schemes from public sector
and five schemes from private sector mutual funds which have a history of more than five
years.
The list of mutual fund schemes selected for the study is given below:
1. Birla Sun Life 95- Growth
2. HDFC Balanced Fund- Growth
3. Reliance Regular Savings Balanced- Growth
4. Franklin Templeton Balanced Fund- Growth
5. Tata Balanced Fund- Growth
6. UTI Balanced Fund- Growth
7. SBI Magnum Balanced Fund- Growth
8. Canara Robeco Balance fund- Growth
9. LIC Balanced-Plan C Growth- Growth
10. Baroda Pioneer Balance Fund- Growth
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Sampling Method:
Convenient Random Sampling is used for collecting the samples.
Convenience sampling is used in exploratory research where the samples are collected at the
convenience of the researcher. This non probability method is often used during preliminary
research efforts to get a gross estimate of the results, without incurring the cost or time
required to select a random sample.
Sources of Data:
Primary Data
Primary data refers to the data that has been collected for the first time for a research.
Primary data has been collected from the respective fund house‟s websites and also
from the scheme brochures.
Secondary Data
Secondary data is the data that have been already collected by and readily available
from other sources.
The secondary data has been collected from various websites, magazines, books etc.
Chapter Scheme:
Chapter-1: Introduction
Chapter-2: Research Design
Chapter-3: Industry and Company Profile
Chapter-4: Data Analysis and Interpretation
Chapter-5: Findings, Suggestions and Conclusions.
Limitations of the Study:
The study is restricted to secondary data only.
Different tools used for analysis may suggest different results as the approach differs.
The study considers data for only a limited period of time.
The study is based only on selected 10 schemes therefore limiting the area of
research.
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Tools for analysis:
The following are some of the tools that will be used to analyse the performance of the
selected mutual fund schemes.
1. Beta:
It measures the systematic risk and shows how prices of securities respond to the market
forces. It is calculated by relating the return on a security with return for the market. By
convention, market will have beta 1.0 Mutual fund is said to be volatile, more volatile or less
volatile. If beta is greater than 1 the stock is said to be riskier than market. If beta is less than
1, the indication is that stock is less risky in comparison to market. If beta is zero then the
risk is the same as that of the market. Negative beta is rare.
Beta is calculated as:
Covariance (Kj, Km)
β = ------------------------------------
Variance (Km)
where,
Kj is the returns on the portfolio or stock - DEPENDENT VARIABLE
Km is the market returns or index - INDEPENDENT VARIABLE
Variance is the square of standard deviation
2. Standard deviation:
It is used to measure the variation in individual returns from the average expected return over
a certain period. Standard deviation is used in the concept of risk of a portfolio of
investments; higher standard deviation means a greater fluctuation in expected return.
² = ∑ (x-x') ²
√ N-1 Where
² : Variance of Return
: Standard Deviation of Return
X : Return for the stock in period
x' : Arithmetic Return
N : Number of periods
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3. Sharpe index:
Sharpe index was given by WF Sharpe in 1966, it measures risk premium of a portfolio,
relative to the total amount for risk in the portfolio. Sharpe index summarizes the risk and
return of a portfolio in a single measure that categorizes the performance of funds on the risk-
adjusted basis. The larger the Sharpe Index, the portfolio over performance the market and
vice versa.
Sharpe Index =
4. Treynor’s Index :
It was given by Jack Treynor in 1965, it is expressed as a ratio of returns to systematic risk
i.e., beta. It adjusts return based on systematic risk, therefore it is relevant for performance
measurement when evaluating portfolios separately or in combination with other portfolios.
Treynor Index =
5. Jensen Measures:
It is a regression of excess fund return with excess market return given by MC Jensen in
1968. It is also popularly known as Jensen‟s alpha based on Capital Asset Pricing Model
(CAPM). It reflects the difference between the return actually earned on a portfolio and the
return the fund was expected to earn, given its beta as per the CAPM.
Ri = Rp-[Rf + Bp (Rm - Rf)]
Rm = Return on the market portfolio.
Rp = Portfolio‟s actual return during a specified time period
Rf = Risk-free rate of return during the same period
Bp = beta of the portfolio
Portfolio Average Return (Rp) – Risk Free Rate of Interest (R
t)
Standard Deviations of the Portfolio Return
Portfolio Average Return (Rp)-Risk Free Rate of Interest (Rt)
Beta Coefficient of Portfolio
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Calculation of Net Asset Value
NAV or Net Asset Value of the fund is the cumulative market value of the assets of the
scheme minus its liabilities. The NAV per unit is the net asset value of the scheme divided by
the number of units outstanding on the Valuation Date.
The value of all the securities in the portfolio in calculated daily. From this, all expenses
are deducted and the resultant value divided by the number of units in the fund is the
fund‟s NAV.
The Formula for NAV is as follows,
NAV= Market value of the Fund‟s Investments+ Receivables
+Accrued Income –Liabilities – Accrued Expenses
Number of Outstanding Units
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Terms Used:
1. Net Asset Value (NAV) – Net Asset Value is the market value of the assets of the
scheme minus its liabilities. The per unit NAV is the net asset value of the scheme
divided by the number of units outstanding on the Valuation Date.
2. Load – A charge that is levied as a percentage of NAV at the time of entry into the
Scheme/Plans or at the time of exiting from the Scheme/Plans. It is usually levied to
meet the costs involved in managing the funds operations.
3. Entry Load – Entry Load is the load or charge imposed when an investor purchases
mutual fund units.
4. Exit Load – Exit Load is the load imposed when an investor redeems or sells the
units.
5. Sale Price – Sale price is the price an investor pays when investing in a scheme.
Also called Offer Price. It may include a sales load.
6. Repurchase Price – 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.
7. Redemption Price – 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.
8. Asset under management (AUM) – The total market value of the assets owned
by a mutual fund. The asset level depends on the market valuation and the money held