Project Report New

A Project Report On:

Need of financial advisors for mutual fund investors

(With special reference to KARVY)

Interim report SUBMITTED BY:

JYOTI VERMA

Roll no. - pgpm/07-09/23

Under the guidance of:

Mr. Rohit vyas prof. p. mahapatra

Product head( MF), Eastern region, faculty,ASBM,Bhubaneswar

KARVY, Kolkata

ASIAN SCHOOL OF BUSINESS MANAGEMENT,ASIAN SCHOOL OF BUSINESS MANAGEMENT,

BHUBANESWARBHUBANESWAR

CONTENTS:

serial no Topic Page no.

1 certificate by organization 4

2 certificate by faculty guide 5

3 Acknowledgement 6

4 executive summary 7

5 company overview 8—17

6 karvy at eastern zone 17—20

7 mutual funds basics 21--31

8 concept of benchmarking 31

9 financial planning for investors 32

10 why has it becomethe largest financial intermediary? 32-34

11 how investors choose between funds? 34-36

12 most popular stocks among fund managers 37

13 most lucrative sectors among fund managers 38-39

14 Systematic Investment Plan (in details) 39-41

15 does fund ranking and performance persist? 42-43

16 portfolio analysis tools 44-49

17 research report 50

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DECLARATION

I, Ms. JyotiVerma do hereby declare that the project report titled “NEED OF

FINANCIAL ADVISORS FOR MUTUAL FUND INVETORS” is a

genuine research work undertaken by me and it has not been published

anywhere earlier.

Date:

Place:

Jyoti Verma

ASBM, Bhubaneswar

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Mr. Rohit Vyas

Product Head (MF),

Eastern zone, KARVY

Certificate by the organization:

This is to certify that Ms. Jyoti verma, pursuing PGPM at Asian

School of Business Management, Bhubaneswar has worked under my

supervision and guidance on her dissertation entitled “Need of

financial advisors for Mutual Fund investors” at

Karvy Stock Broking Limited, Kolkata from April 10th

2008 to June 4th 2008. ” To the best of my knowledge this is an

original piece of work.

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Prof. P.Mahapatra

Asian School of Business Management,

Bhubaneswar

Certificate by the faculty guide:

This is to certify that the project report entitled “Need of

financial advisors for Mutual Fund Investors” at

Karvy Stock Broking Limited is a bonafide record of work

done by Jyoti Verma, and submitted in partial fulfillment of the

requirements of PGPM program of Asian School of Business

Management, Bhubaneswar.

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Acknowledgement

Sometimes words fall short to show gratitude, the same happened with me during this project. The immense help and support received from Karvy stock broking limited overwhelmed me during the project.

My sincere gratitude to Mr.Alok Chaturvedi (Head, eastern region, karvy) and Dr.

Biswajeet Pattanaik (Director, ASBM, Bhubaneswar), for providing me with an

opportunity to work with karvy stock broking limited.

I am highly indebted to Mr. Rohit Vyas., product head ( MF), eastern zone, karvy and

company project guide, who has provided me with the necessary information and his

valuable suggestion and comments on bringing out this report in the best possible way.

I also thank Prof. P. Mahapatra, faculty guide, ASBM, Bhubaneswar who has sincerely

supported me with the valuable insights into the completion of this project.

I am grateful to Mr. Dhirendra Pradhan (branch head, Karvy, JDR) and all of the members

of Rashbehari Avenue branch, who have helped me in the successful completion of this

project, special mention of Ms. Debarati dey, Ms. Nidhi dhingra, Mr. Debasish panda and

Mr. Jyotirmoyee Bhattacharjee.

Last but not the least; my heartfelt love for my parents, whose constant support and blessings

helped me throughout this project.

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Executive summary:

This project has been a great learning experience for me; at the same time it gave me enough

scope to implement my analytical ability. This project as a whole can be divided into two

parts:

The first part gives an insight about the mutual funds and its various aspects. It is

purely based on whatever I learned at karvy. One can have a brief knowledge about

mutual funds and all its basics through the project. Other than that the real servings

come when one moves ahead. Some of the most interesting questions regarding

mutual funds have been covered. Some of them are: why has it become one of the

largest financial intermediaries? How investors do chose between funds? Most

popular stocks among fund managers, most lucrative sectors for fund managers, a

special report on Systematic Investment Plan, does fund performance persists and the

topping of all the servings in the form of portfolio analysis tool and its application.

All the topics have been covered in a very systematic way. The language has been

kept simple so that even a layman could understand. All the datas have been well

analyzed with the help of charts and graphs.

The second part consists of datas and their analysis, collected through a survey done

on 200 people. It covers the topic” need of financial advisors for mutual fund

investors”. The data collected has been well organized and presented. Hope the

research findings and conclusions will be of use. It has also covered why people don’t

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want to go for financial advisors? The advisors can take further steps to approach

more and more people and indulge them for taking their advices.

Organization overview

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Introduction:

“Success is a journey, not a destination.” If we look for examples

to prove this quote then we can find many but there is none like that of karvy. Back in the year 1981,

five people created history by establishing karvy and company which is today known as karvy, the

largest financial service provider of India.

Success sutras of karvy:

The success story of karvy is driven by 8 success sutras adopted by it namely trust,

integrity, dedication, commitment, enterprise, hard

work and team play, learning and innovation, empathy

and humility. These are the values that bind success with karvy.

Vision of karvy:

To achieve & sustain market leadership, Karvy shall aim for complete customer satisfaction, by

combining its human and technological resources, to provide world class quality services. In the

process Karvy shall strive to meet and exceed customer's satisfaction and set industry standards.

Mission statement:

“Our mission is to be a leading and preferred service

provider to our customers, and we aim to achieve this

leadership position by building an innovative,

enterprising , and technology driven organization which

will set the highest standards of service and business

ethics.”

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The success ladder:

Company overview:

Karvy was established as karvy and company by five chartered accountants during the year

1979-80, and then its work was confined to audit and taxation only. Later on it diversified

into financial and accounting services during the year 1981-82 with a capital of rs.150000. it

achieved its first milestone after its first investment in technology. Karvy became a known

name during the year 1985-86 when it forayed into capital market as registrar.

Evolution of KARVY:

It is well said that success is a journey not a destination and we can see it being proved by

karvy. Under this section we will see that how this “karvy and company” of 1980 became

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“karvy” of 2008. Karvy blossomed with the setting up of its first branch at Mumbai during

the year 1987-88. The turning point came in the year 1989 when it decided to enter into one

of the not only emerging rather potential field too i.e; stock broking. It added the feather of

stock broking into its cap. At the same time it became the member of Hyderabad Stock

Exchange through associate firm karvy securities ltd and then karvy never looked

back……..it went on adding services one after another, it entered into retail stock broking in

the year 1990. Karvy investor service centers were set up in the year 1992. Karvy which

already enjoyed a wide network through its investor service centers, entered into financial

product distribution services in the year 1993. One year more and karvy was now dealing

into mutual fund services too in the year 1994 but it didn’t stopped there, it stepped into

corporate finance and investment banking in the year 1995.

Karvy’s strategy has always been being the first entrant in the market. Karvy again hit the

limelight by becoming the first registrar in the country to be awarded ISO 9002 in the year

1997. Then it stepped into the other most happening sector i.e; IT enabled services by

establishing its own BPO units and at a gap of just 1 year it took the path of e-Business

through its website www.karvy.com . Then it entered into insurance services in the year 2001

with the launch of its retail arm “karvy- the finapolis: your personal finance advisor”. Then

in the year 2002 it launched its PCG(Private Client Group) which looks after its High

Networth Individuals .and maintain their portfolio and provides them with other financial

services. In the year 2003, it commenced secondary debt and WDM trading.

It was a decade which saw many Indian companies going global…..so why the largest

financial service provider of India should lag behind? Hence, karvy launched “karvy global

services limited” after entering into a joint venture with Computershare, Australia in the year

2004.the year 2004 also saw karvy entering into commodities marketing through karvy

comtrade.

Year 2005 saw karvy establishing a separate branch for its insurance services under the head

“ karvy insurance broking ltd” and in the same year, after being impressed with the rapid

growth of karvy stock broking limited, PCG group of Hong Kong acquired 25% stake at

KSBL. In the year 2006, karvy entered into one of the hottest sector of present time i.e real

estate through Karvy realty& services (India) ltd. hence , we can see now karvy being

established as the lagest financial service provider of the country.

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Now karvy group consists of 8 highly renowned entities which are as follow:

1. : The first securities registry to receive ISO 9002 certification in India.

Registered with SEBI as Category I Registrar, is Number 1 Registrar in the Country. The

award of being ‘Most Admired’ Registrar is one among many of the acknowledgements we

received for our customer friendly and competent services.

2. : karvy stock broking ltd. Consists of five units namely stock broking

servics, depository participant, advisory services, distribution of financial products, advisory

services and private client goups.

3. : it is registered with SEBI as a category 1 merchant banker. Its clientele

includesinclude leading corporates, State Governments, foreign institutional investors, public

and private sector companies and banks, in Indian and global markets.

4. : karvy insurance broking ltd is also a part of karvy stock broking ltd. At

Karvy Insurance Broking Limited both life and non-life insurance products are provided to

retail individuals, high net-worth clients and corporates.

5. : The company provides investment, advisory and brokerage services in

Indian Commodities Markets. And most importantly, it offer a wide reach through our

branch network of over 225 branches located across 180 cities.

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6. : Karvy Global is a leading business and knowledge process

outsourcing Services Company offering creative business solutions to clients globally. It

operates in banking and financial services, inurance, healthcare and pharmaceuticals,

media , telecom and technology. It has its sales and business development office in New

York, USA and the offshore global delivery center in Hyderabad, India

7. : Karvy Realty (India) Limited is engaged in the business of real estate and property services offering:

Buying/ selling/ renting of properties

Identifying valuable investments opportunities in the real estate sector

Facilitating financial support for real estate and investments in properties

Real estate portfolio advisory services

8. : it is a joint venture between Computershare, Australia and Karvy

Consultants Limited, India in the registry management services industry.

Organization structure of karvy:

talking about the organization structure of karvy, we have the board of directors as the supreme

governing body , the chairman being Mr. C parthasarthy, mr. m yugandhar as the managing director,

mr m s ramakrishna andmr. Prasad v. potluri as directors.

The board of diretors head the karvy group, karvy computershares limited, karvy investors services

ltd., karvy comtrade, karvy stock broking ltd., and karvy global services ltd.

Karvy group being the flagship company looks after the functional departments such as corporate

affairs, group human resources, finance & accounting, training & development, technology services

and corporate quality.

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Karvy computershare private limited facilitates mutual fund services, share registry and issue

registry whereas merchant banking is looked after by karvy investor services ltd. Karvy stock broking

ltd heads its another branch too ie. Karvy insurance broking ltd. The services offered by KSBL are:

stock broking, depository, research, distribution, personal client group and institutional desk. And

finally the BPO services are managed by karvy global services ltd. Summarizing it in a diagram, it

can be presented as:

Spectrum of services offered by karvy:

Karvy being the top registrar and transfer agent, functions as registrar in most of the issues in the

country. Talking about the mutual fund services offered by karvy, we can get the products of 33

AMCs over here. it deals in both closed ended funds as well as open ended too. Now one must be

thinking why to get the mutual funds from karvy instead of getting it directly from AMCs???we have

great reasons for it: the first one being ; if we avail the services of karvy then we can get the

information about all the AMCs and their products at a single place along with expert

recommendations whereas at an AMC we can get information about the products of that specific

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AMC only. And the second being wide network of karvy….nowadays we can find karvy offices at

remote areas too.

Along with these, karvy is very well handling the role of depository participant. Being registered

with both the depositories i.e.; NSDL (national securities depository ltd) and CDSL (central

depository services ltd), karvy can have access to both. Its wide network also facilitates it in

distribution of retail financial products.

Karvy believes in being updated always. So it is always ready to use latest technologies so that its

clients always be in touch with the latest happenings along with karvy. It offers e-business through

internet through its website: www.karvy.com . Other than it, it also provides its various services

through SMSes.

Karvy’s services are not limited to its investors only rather its offerings are for its corporate clients

and distributors too. it is very well aware of the fact that in this era of neck to neck competition, we

cant ignore any of the aspects of our business….so there’s a offering for everybody…everyone’s

welcome at karvy.

Why should investors choose for karvy?

Excellence is next to nothing….and here at karvy everybody tries their best to offer excellent services

to its clientele through its offerings maintaining the karvy culture which includes:

1. Controlled and low cost service culture: karvy is there to serve its client at the minimum possible

cost. it controls cost by its various cost- cutting techniques and minimization of avoidable costs.

2. Large volume processing capability: being the largest financial service provider in the country, it

has the unique distinction of operating its activities on a large scale which benefits all the parties

cordially.

3. Adherence to strict time schedule: karvy knows that time is money and tries it best to finish the task within the stipulated time schedule.

4. Expertise in coordinating multi-location responses: karvy has got a wide network and hence one

can find its branches at most of the places in India. Thus it enjoys its presence everywhere and

coordinates among itself in solving the queries and in responding to any situation.

5.Expertise in managing independent entities such as banks, post-office etc.: the work culture of

karvy and the ethics followed inside karvy makes its workforce compatible with everybody, so the

karvy people establishes good coordination with independent entities too.

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6. Pooling of group resources: karvy group consists of eight subsidiaries, so it can easily pool up its

resources for accomplishment of its goals, whenever needed. The groups can help each other

whenever there are peaks and lows, and even in the case when they have huge targets just as we saw

few years back, Tata group pooling its resources to acquire Corus.

How karvy achieved it?

The core competency of karvy lies in the following points due to which it enjoys a competitive edge

over its competitors. The following culture adopted by karvy makes it all time favorite among its

clientele:

1. Professionally managed by qualified and trained manpower.

2. Uniquely structured in-house software and hardware department

3. Query handling within 48 hrs.

4. Strong secretarial, accounting and audit systems.

5. Unique work culture of working 7 days a week in 3 shifts.

6. Unmatched network spreading all over India.

How Achievements sounds synonymous to karvy:

The landmarks achieved by karvy very well define its success story. In the previous pages,

we learnt how a company started by five chartered accountants, named as karvy and

company turned into today’s karvy group, the largest financial intermediary of India. But

success didn’t came to karvy at a flow, the hard work and dedication of its workforce made it

what it is today…gradually it achieved the following landmarks and now it has became what

we call the karvy group, now it is:

1.largest independent distributor for financial products.

2.amongst the top 5 stock broker.

3.among the top 3 depository participants.

4.largest network of branches & business associates.

5.ISO 9002 certified operations by DNV.

6.Amongst top 10 investment bankers.

7.adjudged as one of the top 50 IT users in India by MIS south Asia.

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8.full- fledged IT driven operation.

9.India’s no.1 registrar & securities transfer agent.

Clientele of karvy:

Karvy’s culture has helped karvy in achieving such a distinct position in the market where it can

boast of its huge client base. Be it a retail investor investing Rs. 500 in a SIP in Reliance mutual fund

or be it the largest corporate house of the country: Reliance industries- everybody is heading towards

karvy for their wealth maximization, lets have a look at the clientele of karvy :

According to the datas published in year 2007, karvy stock broking ltd. Operates through

more than 12000 terminals, more than 290000 accounts are maintained and commands over

3.14% market share of NSE. The distribution services has access to more than Rs. 40 billion

Assets Under Management. Karvy being a depository participant with both NSDL and

CDSL, manages more than 700000 accounts from more than 380 locations. Talking about

the registry services, it manages over 750 public/ right issues.at the same time, it is managing

over 16 million portfolios as registrar.

If we took a

look at some of the top corporate houses availing the services of karvy then we have: Reliance, IOC,

IDBI,LIC, Hindustan Unilever, Principal Mutual Fund, Duetsche Mutual Fund, Yogokawa, Marico

Industries, Patni Computers, Morgan Stanley, Glenmark, CRISIL, 3M, Kotak Mahindra Bank, Bharti

Televenture, Infosys Technologies, Wipro, Infotech, IPCL,TATA consultancy services, UTI mutual

fund etc. Thus in total karvy serves over 16 million investors and 300 corporates.

Now, as the project was carried on in Kolkata, so there is a special reference to working of karvy at eastern zone and mutual funds in particular.

KARVY at eastern zone:

Karvy stock Broking Ltd was started 11 yrs ago i.e.; during the year 1996 at Jatin Das road which

was later on established as the regional head office. Presently Mr. Alok Chaturvedi is heading the

eastern zone. Talking about the zonal offices, Karvy has zonal offices at Kolkata, south Bengal, north

Bengal, North east, Jharkhand, Bihar, Orissa and Chhattisgarh. Each zonal office has got its own

zonal heads. Karvy is a member of three stock exchanges of India: National Stock Exchange (NSE),

Bombay Stock Exchange (BSE) and Hyderabad Stock Exchange (HSE).

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Hierarchical Structure in diagram:

The above diagram shows the hierarchy of Karvy stock broking ltd. It can be easily depicted from

the diagram that the regional head (presently Mr. Alok Chaturvedi) is the supreme in the eastern

region, under whom the various zonal heads operate and under these zonal heads, the branch heads

operate. Between each level o the hierarchy, there exists a coordinator, who acts as the facilitator

between the different heads.

Karvy at Kolkata:

Now if we look at karvy’s branch offices at Kolkata, then there exist ten branches of karvy at Kolkata, which are as follow:

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1. Lake Town.

2. Burra bazaar.

3. Shyam bazaar.

4. Dalhousie.

5. New Alipore.

6. Behala.

7. Jatin Das Road.

8. Phoolbagan.

9. Salt Lake.

10. Howrah.

Structure according to the Products offered by Karvy:

KA

KARVY Mutual Fund Services:

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REGIONAL HEADS

REGIONAL HEADS

PRODUCT HEADS

HEA

PRODUCT HEADS

HEA

Mutual funds

Mutual funds

Insurance broking

Insurance broking

commodities

commodities

Stock broking

Stock broking

Depository participant

Depository participant

Merchant & inv.banking

Merchant & inv.banking

PMSPMS

RealtyRealty

Debt division

Debt division

Mutual funds have servings for everybody. Whichever type of investor you are, you will

surely get a mutual fund meeting your requirements. But investing in mutual funds is no

child’s play therefore karvy mutual fund advisory services is there to guide in each and

every step of investment in mutual funds so that the dream of wealth creation doesn’t turns

into nightmares. Its offerings includes: products of all the 33 major AMCs, research report

about all the existing funds as well as NFOs, customized mutual fund portfolios designed for

individual as well as institutional customers, it not only design the portfolios rather it offers

continuous portfolio revision too depending on changing market outlook and evolving

trends, it further gives access to its online consolidated portfolio statement. Thus karvy with

its various offerings makes the investor feel safe in this dynamic environment of the Indian

financial market.

Karvy Computershare mutual fund services offers investors services, distributor services and client

services. It can be said that karvy is dedicated towards providing quality service to all these three

facets of the investment process.

Karvy being an intermediary is well registered with the Association of Mutual Funds of India

(AMFI). KARVY has got the registration no [ARN 0018] for mutual funds, which is mentioned on

every form. After the procurement of forms from various AMCs, the forms are passed on to its

various zonal and branch offices (as per their requirements) and then further processing is done either

directly or through sub-brokers.

Karvy operates through its sub- brokers, associates and its excellent pool of own direct employees.

The employees are offered salary by karvy whereas the sub- brokers and associates get certain

commission. Karvy has 70 branches and 3 franchisees in the eastern region. All the work of mutual

funds is regulated from Rashbehari avenue branch, an extension of the JDR branch.

The main source of earning for KARVY is the brokerage offered by the various AMCs known as

pay-in. The amount offered may vary from AMC to AMC. Also, the franchisees have to pay a certain

amount every month. Now karvy also pay a certain amount to the sub brokers and associates known

as pay-out. The payout is decided according to the procurement done by them.

Recruitment:

Karvy has an enviable pool of dynamic employees. Its people power has a great contribution in

making it the No. 1 financial intermediary. All the employees of karvy dealing in mutual funds have

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to go through AMFI test. The recruitment process is at par with the industry standards, it is mostly

done through campus recruitment from reputed B- schools. Other than that, it also recruits through

direct interviews and GDs as per their requirement.

Karvy never compromises with quality that’s the reason it is excelling by providing quality services

to all the investors, clients, AMCs etc. associated with it.

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Mutual funds

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it’s all about mutual funds:

Mutual funds: A mutual fund is a professionally-managed firm of collective investments that pools

money from many investors and invests it in stocks, bonds, short-term money market instruments,

and/or other securities.in other words we can say that A Mutual Fund is a trust registered with the

Securities and Exchange Board of India (SEBI), which pools up the money from individual /

corporate investors and invests the same on behalf of the investors /unit holders, in equity shares,

Government securities, Bonds, Call money markets etc., and distributes the profits.

The value of each unit of the mutual fund, known as the net asset value (NAV), is mostly calculated

daily based on the total value of the fund divided by the number of shares currently issued and

outstanding. The value of all the securities in the portfolio in calculated daily. From this, all expenses

are deducted and the resultant value divided by the number of units in the fund is the fund’s NAV.

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

Advantages of a MF

– Mutual Funds provide the benefit of cheap access to expensive stocks

– Mutual funds diversify the risk of the investor by investing in a basket of assets

– A team of professional fund managers manages them with in-depth research inputs from investment analysts.

– Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate information, which individual investors cannot access.

History of the Indian mutual fund industry:

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the

initiative of the Government of India and Reserve Bank. The history of mutual funds in India can be

broadly divided into four distinct phases.

 First Phase – 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament by the Reserve Bank of

India and functioned under the Regulatory and administrative control of the Reserve Bank of India.

In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took

over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was

Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management.

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

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

Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual

Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual

Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89),

Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in

June 1989 while GIC had set up its mutual fund in December 1990.At the end of 1993, the mutual

fund industry had assets under management of Rs.47,004 crores.

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

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

mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now

merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised

Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund)

Regulations 1996. As at the end of January 2003, there were 33 mutual funds with total assets of Rs.

1,21,805 crores.

Fourth Phase – since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into

two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under

management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US

64 scheme, assured return and certain other schemes

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

SEBI and functions under the Mutual Fund Regulations. consolidation and growth. As at the end of

September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.

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Categories of mutual funds:

Mutual funds can be classified as follow:

Based on their structure:

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

Close-ended funds: These funds raise money from investors only once. Therefore, after the

offer period, fresh investments can not be made into the fund. If the fund is listed on a stocks

exchange the units can be traded like stocks (E.g., Morgan Stanley Growth Fund). Recently,

most of the New Fund Offers of close-ended funds provided liquidity window on a periodic

basis such as monthly or weekly. Redemption of units can be made during specified

intervals. Therefore, such funds have relatively low liquidity.

Based on their investment objective:

Equity funds: These funds invest in equities and equity related instruments. With fluctuating

share prices, such funds show volatile performance, even losses. However, short term

fluctuations in the market, generally smoothens out in the long term, thereby offering higher

returns at relatively lower volatility. At the same time, such funds can yield great capital

appreciation as, historically, equities have outperformed all asset classes in the long term.

Hence, investment in equity funds should be considered for a period of at least 3-5 years. It

can be further classified as:

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i) Index funds- In this case a key stock market index, like BSE Sensex or Nifty is tracked. Their portfolio mirrors the benchmark index both in terms of composition and individual stock weightages.

ii) Equity diversified funds- 100% of the capital is invested in equities spreading across different sectors and stocks.

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

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

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

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

Balanced fund: Their investment portfolio includes both debt and equity. As a result, on the risk-

return ladder, they fall between equity and debt funds. Balanced funds are the ideal mutual funds

vehicle for investors who prefer spreading their risk across various instruments. Following are

balanced funds classes:

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

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

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

taking risk associated with equities. Therefore, they invest exclusively in fixed-income instruments

like bonds, debentures, Government of India securities; and money market instruments such as

certificates of deposit (CD), commercial paper (CP) and call money. Put your money into any of

these debt funds depending on your investment horizon and needs.

i) Liquid funds- These funds invest 100% in money market instruments, a large portion being invested in call money market.

ii)Gilt funds ST- They invest 100% of their portfolio in government securities of and T-bills.

iii)Floating rate funds - Invest in short-term debt papers. Floaters invest in debt instruments which have variable coupon rate.

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iv)Arbitrage fund- They generate income through arbitrage opportunities due to mis-pricing between

cash market and derivatives market. Funds are allocated to equities, derivatives and money markets.

Higher proportion (around 75%) is put in money markets, in the absence of arbitrage opportunities.

v)Gilt funds LT- They invest 100% of their portfolio in long-term government securities.

vi) Income funds LT- Typically, such funds invest a major portion of the portfolio in long-term debt papers.

vii) MIPs- Monthly Income Plans have an exposure of 70%-90% to debt and an exposure of 10%-30% to equities.

viii)FMPs- fixed monthly plans invest in debt papers whose maturity is in line with that of the fund.

Investment strategies:

1. Systematic Investment Plan: under this a fixed sum is invested each month on a fixed date of a

month. Payment is made through post dated cheques or direct debit facilities. The investor gets fewer

units when the NAV is high and more units when the NAV is low. This is called as the benefit of

Rupee Cost Averaging (RCA)

2. Systematic Transfer Plan: under this an investor invest in debt oriented fund and give

instructions to transfer a fixed sum, at a fixed interval, to an equity scheme of the same mutual fund.

3. Systematic Withdrawal Plan: if someone wishes to withdraw from a mutual fund then he can

withdraw a fixed amount each month.

27

Risk v/s. return:

Working of a Mutual fund:

28

The entire mutual fund industry operates in a very organized way. The investors, known as unit

holders,handover their savings to the AMCs under various schemes. The objective of the investment

should match with the objective of the fund to best suit the investors’ needs. The AMCs further invest

the funds into various securities according to the investment objective. The return generated from the

investments is passed on to the investors or reinvested as mentioned in the offer document.

Regulatory Authorities:

To protect the interest of the investors, SEBI formulates policies and regulates the mutual funds. It

notified regulations in 1993 (fully revised in 1996) and issues guidelines from time to time.

SEBI approved Asset Management Company (AMC) manages the funds by making investments in

various types of securities. Custodian, registered with SEBI, holds the securities of various schemes of

the fund in its custody.

According to SEBI Regulations, two thirds of the directors of Trustee Company or board of trustees

must be independent.

The Association of Mutual Funds in India (AMFI) reassures the investors in units of mutual funds that

the mutual funds function within the strict regulatory framework. Its objective is to increase public

awareness of the mutual fund industry. AMFI also is engaged in upgrading professional standards and

in promoting best industry practices in diverse areas such as valuation, disclosure, transparency etc.

Documents required (PAN mandatory):

Proof of identity :1.photo PAN card

2. In case of non-photo PAN card in addition to copy of PAN card any one of the following: driving

license/passport copy/ voter id/ bank photo pass book.

Proof of address (any of the following ) :latest telephone bill, latest electricity bill, Passport, latest bank

passbook/bank account statement, latest Demat account statement, voter id, driving license, ration card,

rent agreement.

Offer document: an offer document is issued when the AMCs make New Fund Offer(NFO). Its

advisable to every investor to ask for the offer document and read it before investing. An offer

document consists of the following:

Standard Offer Document for Mutual Funds (SEBI Format)

Summary Information

Glossary of Defined Terms

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Risk Disclosures

Legal and Regulatory Compliance

Expenses

Condensed Financial Information of Schemes

Constitution of the Mutual Fund

Investment Objectives and Policies

Management of the Fund

Offer Related Information.

Key Information Memorandum: a key information memorandum, popularly known as KIM, is

attached along with the mutual fund form. And thus every investor get to read it. Its contents are:

1.name of the fund.

2.investment objective

3.asset allocation pattern of the scheme.

4.risk profile of the scheme

5.plans & options

6.minimum application amount/ no. of units

7.benchmark index

8.dividend policy

9.name of the fund manager(s)

10.expenses of the scheme: load structure, recurring expenses

11.performance of the scheme (scheme return v/s. benchmark return)

12.year- wise return for the last 5 financial year.

Distribution channels:

mutual funds posses a very strong distribution channel so that the ultimate customers doesn’t face any

difficulty in the final procurement. The various parties involved in distribution of mutual funds are:

1.Direct marketing by the AMCs: the forms could be obtained from the AMCs directly. The

investors can approach to the AMCs for the forms. some of the top AMCs of India are;

Reliance ,Birla Sunlife, Tata, SBI magnum, Kotak Mahindra, HDFC, Sundaram, ICICI, Mirae

Assets, Canara Robeco, Lotus India, LIC, UTI etc. whereas foreign AMCs include: Standard

Chartered, Franklin Templeton, Fidelity, JP Morgan, HSBC, DSP Merill Lynch, etc.

2.broker/ sub broker arrangements: the AMCs can simultaneously go for broker/sub-broker to

popularize their funds. AMCs can enjoy the advantage of large network of these brokers and

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sub brokers.eg: KARVY being the top financial intermediary of India has the greatest network.

So the AMCs dealing through KARVY has access to most of the investors.

3.Individual agents, Banks, NBFC: investors can procure the funds through individual agents,

independent brokers, banks and several non- banking financial corporations too, whichever he

finds convenient for him.

Costs associated:

Expenses:

AMCs charge an annual fee, or expense ratio that covers administrative expenses, salaries,

advertising expenses, brokerage fee, etc. A 1.5% expense ratio means the AMC charges

Rs1.50 for every Rs100 in assets under management. A fund's expense ratio is typically to the

size of the funds under management and not to the returns earned. Normally, the costs of

running a fund grow slower than the growth in the fund size - so, the more assets in the fund,

the lower should be its expense ratio

Loads:

Entry Load/Front-End Load (0-2.25%)- its the commission charged at the time of buying

the fund to cover the cost of selling, processing etc.

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

investor exits from a mutual fund, it is imposed to discourage withdrawals. It may reduce to

zero with increase in holding period.

Measuring and evaluating mutual funds performance:

Every investor investing in the mutual funds is driven by the motto of either wealth creation or

wealth increment or both. Therefore it’s very necessary to continuously evaluate the funds’

performance with the help of factsheets and newsletters, websites, newspapers and

professional advisors like karvy mutual fund services. If the investors ignore the evaluation of

funds’ performance then he can loose hold of it any time. In this ever-changing industry, he

can face any of the following problems:

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1.variation in the funds’ performance due to change in its management/ objective.

2.the funds’ performance can slip in comparison to similar funds.

3. there may be an increase in the various costs associated with the fund.

4.beta, a technical measure of the risk associated may also surge.

5.the funds’ ratings may go down in the various lists published by independent rating agencies.

6.it can merge into another fund or could be acquired by another fund house.

Performance measures:

Equity funds: the performance of equity funds can be measured on the basis of: NAV

Growth, Total Return; Total Return with Reinvestment at NAV, Annualized Returns and

Distributions, Computing Total Return (Per Share Income and Expenses, Per Share Capital

Changes, Ratios, Shares Outstanding), the Expense Ratio, Portfolio Turnover Rate, Fund Size,

Transaction Costs, Cash Flow, Leverage.

Debt fund: likewise the performance of debt funds can be measured on the basis of: Peer

Group Comparisons, The Income Ratio, Industry Exposures and Concentrations, NPAs,

besides NAV Growth, Total Return and Expense Ratio.

Liquid funds: the performance of the highly volatile liquid funds can be measured on the

basis of: Fund Yield, besides NAV Growth, Total Return and Expense Ratio.

Concept of benchmarking for performance evaluation:

Every fund sets its benchmark according to its investment objective. The funds performance is

measured in comparison with the benchmark. If the fund generates a greater return than the

benchmark then it is said that the fund has outperformed benchmark , if it is equal to

benchmark then the correlation between them is exactly 1. And if in case the return is lower

than the benchmark then the fund is said to be underperformed.

some of the benchmarks are:

1.equity funds: market indices such as S&P CNX nifty, BSE100, BSE200, BSE-PSU, BSE 500

index, BSE bankex, and other sectoral indices.

2.debt funds: Interest Rates on Alternative Investments as Benchmarks, I-Bex Total Return

Index, JPM T-Bill Index Post-Tax Returns on Bank Deposits versus Debt Funds.

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3. liquid funds: Short Term Government Instruments’ Interest Rates as Benchmarks, JPM T-

Bill Index

To measure the fund’s performance, the comparisons are usually done with:

I)with a market index.

ii)funds from the same peer group.

iii)other similar products in which investors invest their funds.

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

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

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

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

mere tax planning. Steps in financial planning are:

Asset allocation.

Selection of fund.

Studying the features of a scheme.

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

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

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

plans of users are chosen using these objectives.

Why has it become one of the largest financial instruments?

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

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

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

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

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

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

form

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Return  Safety  Volatility  Liquidity  Convenience 

Equity  High  Low  High  High  Moderate 

Bonds  Moderate  High  Moderate  Moderate  High 

Co.

Debentures 

Moderate  Moderate  Moderate  Low  Low 

Co. FDs  Moderate  Low  Low  Low  Moderate 

Bank

Deposits 

Low  High  Low  High  High 

PPF  Moderate  High  Low  Moderate  High 

Life

Insurance 

Low  High  Low  Low  Moderate 

Gold  Moderate  High  Moderate  Moderate  Gold 

Real Estate  High  Moderate  High  Low  Low 

Mutual

Funds 

High  High  Moderate  High  High 

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

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

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

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

convenience involved with investing in equities is just moderate.

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

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

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

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

safety level, even the liquidity and convenience involved are too low. Gold have always been a

favourite among Indians but when we look at it as an investment option then it definitely

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

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

funds and serve the needs of only a specific customer group. Straightforward, we can say that

mutual fund emerges as a clear winner among all the options available.

The reasons for this being:

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

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

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

enjoy the best investment option as per the investment objective.

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

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

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

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

problem. Now everybody can choose their fund according to their investment objectives.

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

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

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

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

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

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

and that is the flexibility that mutual funds offer regarding the investment amount. One can

start investing in mutual funds with amount as low as Rs. 500 through SIPs and even Rs. 100

in some cases.

How do investors choose between funds?

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

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

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

objective matches with that of the investor’s. Now the tough task for investors start, they may

carry on the further process themselves or can go for advisors like KARVY. Of course the

investors can save their money by going the direct route i.e. through the AMCs directly but it

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

investor is not an expert. So it is always advisable to go for MF advisors. The mf advisors’

thoughts go beyond just investment objectives and rate of return. Some of the basic tools

which an investor may ignore but an mf advisor will always look for are as follow:

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1.

Rupee cost averaging: the investors going for Systematic Investment Plans(SIP) and

Systematic Transfer Plans(STP) may enjoy the benefits of RCA (Rupee Cost Averaging).

Rupee cost averaging allows an investor to bring down the average cost of buying a scheme by

making a fixed investment periodically, like Rs 5,000 a month and nowadays even as low as

Rs. 500 or Rs. 100. In this case, the investor is always at a profit, even if the market falls. In

case if the NAV of fund falls, the investors can get more number of units and vice-versa. This

results in the average cost per unit for the investor being lower than the average price per unit

over time.

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

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

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

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

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

to take advantage of rupee cost averaging. 

2. Rebalancing: Rebalancing involves booking profit in the fund class that has gone up and

investing in the asset class that is down. Trigger and switching are tools that can be used to

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

event occurs. The trigger could be the value of the investment, the net asset value of the

scheme, level of capital appreciation, level of the market indices or even a date. The funds

redeemed can be switched to other specified schemes within the same fund house. Some fund

houses allow such switches without charging an entry load. 

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

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

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

3. Diversification: Diversification involves investing the amount into different options. In case

of mutual funds, the investor may enjoy it afterwards also through dividend transfer option.

Under this, the dividend is reinvested not into the same scheme but into another scheme of the

investor's choice.

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

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

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

4. Tax efficiency: tax factor acts as the “x-factor” for mutual funds. Tax efficiency affects the

final decision of any investor before investing. The investors gain through either dividends or

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

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

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

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

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

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

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

should choose the dividend option. 

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

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

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

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

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

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

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

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

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

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

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

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

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

ONGC and at last ITC ltd.

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What are the most lucrative sectors for mutual fund managers?

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

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

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

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

look forward for a gloomy picture.

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

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

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

(source: moneycontrol.com; 20.05.08)

Sector name No. of MFs betting on itautomotive 255banking & financial services 196cement & construction 237consumer durables 51conglomerates 218chemicals 259consumer non durables 146engineering & capital goods

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

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

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

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

mining and information technology. Sectors performing average are automotive, cement &

39

construction, chemicals, media & entertainment, manufacturing, miscellaneous,

pharmaceuticals and utility. The sectors which are not so favourite are banking & financial

services, conglomerates, consumer non- durables, food & beverages, services and tobacco.

And the sector which failed to attract the fund managers is consumer durables with just 51

funds betting on it.

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

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

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

fund managers are based on several researches carried on so, it is always advisable for other

investors too take a look on it. It can be further presented in the form of a graph as follow:

Systematic investment plan (in details)

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

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

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

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

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

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

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

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

Scheme Amount NAV NAV Date Total AmountReliance diversified power sector retail 1000 62.74 30/5/2008 14524.07Reliance regular savings equity 1000 22.208 30/5/2008 13584.944principal global opportunities fund 1000 18.86 30/5/2008 14247.728DWS investment opportunities fund 1000 35.31 30/5/2008 13791.157BOB growth fund 1000 42.14 30/5/2008 13769.152

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

for the total investment of Rs. 12000. There is reliance diversified power sector retail giving the

maximum returns of Rs. 2524.07 per year which comes to 21% roughly. Next we can see if anybody

would have undertaken the SIP in Principal would have got returns of app. 18%. We can see reliance

regular savings equity, DWS investment opportunities and BOB growth fund giving returns of 13.20%,

14.92%, and 14.74% respectively which is greater than any other monthly investment options. Thus we

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

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

thus putting no pressure on their pockets.

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

deposits In a tabular format as well as graphical.

Scheme Name NO. OF INSTALMENTS Original inv Returns at BSE 200 FUND RETURNS

Birla SL tax relief '96 144 144000 553190 1684008

Birla SL equity fund 114 114000 388701 669219

Birla frontline equity fund 66 66000 156269 181127

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In the above case, we have taken three funds of Birla sunlife namely Birla sunlife tax relief ’96, Birla

sunlife equity fund and Birla sunlife frontline equity fund. All these three funds follow the same

benchmark ie; BSE 200. Here, we have shown how one would have benefitted if he would have put his

money into these schemes since their inception. And the amount even is a meager Rs. 1000 per month.

Starting from Birla frontline equity fund, we could spot that if someone would have invested Rs. 1000

per month resulting into total investment of Rs. 66000 then it would have amounted to rs.156269 if

invested in BSE 200 whereas the fund would have given a total return of Rs 181127. Now moving next

to Birla sunlife equity fund, a total investment of 114000 for a total of 114 months at BSE 200 would

have given a total return of Rs. 388701 whereas the fund gave a total return of Rs. 669219, nearly

double the return generated at BSE 200. And now the cream of all the investments, Birla sunlife tax

relief ’96. A total investment of Rs. 144000 for a period of 12 years at BSE 200 would have given total

returns of just Rs. 553190 but the Birla sunlife tax relief ’96 gave an unbelievable total return of Rs

1684008.

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

how a meager amount of Rs. 144000 turned into Rs. 1684008. It may appear unbelievable for many but

SIPs have turned this into reality and the power of compounding is speaking loud, attracting more and

more investors to create wealth through SIPs.

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Does fund performance and ranking persist?

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

pages are really close to my heart. After taking a look at the data presented below, an expert might

underestimate my efforts. One might think it as a boring task and can go for recording historic NAVs

since last 1 month instead of recording it daily.

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

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

consists of different types of funds. We can see some funds are 5- star rated but their performances are

below the unrated funds. We can also find some funds which performed very well initially but

gradually declined either in short- run or long run. Some funds have high NAVS but the returns offered

are low. We can also see some funds following same benchmark and reflecting diverse NAV and

returns. Even it can be seen that the expense ratios for various funds varies which may affect the

ultimate return.

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

can easily make out that the 1 year return of the fund that was on 17th of april could not be sustained till

1 month. One can sort out that the present return of funds has decreased a lot and subsequently its NAV

too has come down. All the funds are showing negative returns for the last 1 month. Even the two

hybrid funds are showing negative monthly returns. That means all those who bought these funds a

month back must be experiencing a negative return. Although the annual return of the funds have gone

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

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

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

but their returns lag behind the unrated funds. Although, since the ratings include both risk and return

so it will not be a total justice to judge the funds purely on a return basis but still we can go for it just to

judge them on the basis of returns generated.

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

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

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

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

and expenses.

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

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

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

43

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

in the last month. Its 1 month return is -5.8% whereas DBS gave a return of -3.07%. Even if

we consider 6 months return or yearly returns, definitely DBS is a winner. We can easily spot

the difference by change in their rankings even. Considering 1 yr return, we can spot DBS at

no.5 whereas ICICI at no.6 but when we look at the monthly ratings, to our ultimate shock,

DBS is at 52 and ICICI far behind at 172. But if we look at the yearly returns, then there is not

much difference between them, DBS offering returns of 35.17% whereas ICICI offering 34.27.

But looking at the expenses, the expenses charged by ICICI is lower to that of DBS, which

may act as the ultimate factor in choosing the fund in a long run.

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

they are totally irrelevant to investor:

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

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

the current scenario.

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

rating of the mutual fund. If you choose your mutual fund only on the basis of rating, it

will be a nuisance to keep realigning your investment in line with the revision of the

ratings.

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

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

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

with a star fund manager that the ratings don’t reflect. If the star fund manager quits, it

can throw the working of a mutual fund out of gear and thus affect its performance.

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

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

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

by the fund or fund manager will be completely ignored.

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

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

investor-unfriendly.

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

investments should be done only after considering the risk appetite of the investor. For

example, equities may not be the best investment vehicle for a very conservative

44

investor. However ratings fail to take that into account.

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

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

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

investment.

Portfolio analysis tools:

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

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

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

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

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

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

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

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

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

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

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

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

turnover ratio, total expense ratio etc.

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

ratio, portfolio turnover ratio and total expense ratio. So before going into details, lets have a look at

these ratios:

Standard deviation: in simple terms standard deviation is one of the commonly used

statistical parameter to measure risk, which determines the volatility of a fund. Deviation is

defined as any variation from a mean value (upward & downward). Since the markets are

volatile, the returns fluctuate everyday. High standard deviation of a fund implies high

volatility and a low standard deviation implies low volatility.

Beta analysis: beta is used to measure the risk. It basically indicates the level of volatility

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

45

market. In case of funds, beta would indicate the volatility against the benchmark index. It is

used as a short term decision making tool. A beta that is greater than 1 means that the fund is

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

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

performance closely matches the index or benchmark.

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

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

a beta would be grossly inappropriate. For example if we are considering a banking fund, we

should look at the beta against a bank index.

R-Squared (R2): R squared is the square of ‘R’ (i.e.; coefficient of correlation). It describes

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

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

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

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

markets.

For example:

Case 1 Case 2

R2 0.65 0.88

B 1.2 0.9

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

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

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

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

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

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

and yet generating good returns. Thus, given similar returns, the fund with a higher sharpe

ratio offers a better avenue for investing. The ratio is calculated as:

Sharpe ratio = (Average return- risk free rate)/ standard deviation

Portfolio turnover ratio: Portfolio turnover is a measure of a fund's trading activity and is calculated

by dividing the lesser of purchases or sales (excluding securities with maturities of less than one year)

by the average monthly net assets of the fund. Turnover is simply a measure of the percentage of

46

portfolio value that has been transacted, not an indication of the percentage of a fund's holdings that

have been changed. Portfolio turnover is the purchase and sale of securities in a fund's portfolio. A ratio

of 100%, then, means the fund has bought and sold all its positions within the last year. Turnover is

important when investing in any mutual fund, since the amount of turnover affects the fees and costs

within the mutual fund.

Total expenses ratio: A measure of the total costs associated with managing and operating an

investment fund such as a mutual fund. These costs consist primarily of management fees and

additional expenses such as trading fees, legal fees, auditor fees and other operational expenses. The

total cost of the fund is divided by the fund's total assets to arrive at a percentage

amount, which represents the TER:

Total expense ratio = (Total fund Costs/ Total fund Assets)

Performance report and portfolio analysis of magnum equity fund and magnum multiplier plus

against their benchmark BSE100:

YTD 1M 3M 6M 1Y 3Y 5Y

Magnum equity fund

-23.73% 9.02% -7.71% -15.18% 26.61% 45.07% 48.96%

Magnum multiplier plus

-26.16% 5.57% -11.26% -18.00% 21.44% 45.28% 59.31%

BenchmarkBSE100

-17.53% 11.74% -2.56% 11.47% 30.71% 40.46% 44.24%

Now in the above table, we have two funds from SBI ie; magnum equity fund and magnum multiplier

plus following the same benchmark i.e; BSE 100. In this case, we have compared their returns during

various time periods. We have their returns YTD, during last 1 month, 3month, 6 months, 1 year, 3 year

and 5 year. If we look at a long term perspective, then magnum multiplier plus totally outperformed

both magnum equity fund as well as bse 100. In case of 5 year returns, neither the benchmark nor the

47

magnum equity fund stands anywhere near multiplier plus. It is greater than equity fund by 10.35% and

from benchmark by 15.07%. but in case of 3 year returns, surely multiplier plus gave the maximum

return but it fell sharply in comparison to its 5 yr return. A 45.28% return scored over equity fund just

by a margin of 0.21% and benchmark by a mere 4.28%. now moving down to 1 yr return, we can

clearly see that bse 100 emerges as a true winner. The benchmark gave a return of 30.71% but both the

funds failed to match it even.

But the ultimate surprise comes when we look at the datas of last 6 months. Here not only the fund

mangers failed to beat or match the market. Rather they also performed as laggards, giving negative

returns. When the bse 100 gave returns of 11.47%, these funds were trailing by 29.47% and 26.65%

which is a huge figure. In th last 3 months too, both the funds were behind bse100 but all the three gave

negative returns and the difference between them and benchmark was narrowed down. Again, during

last 1 month return of all three got positive but the funds always remained behind the benchmark. The

bse 100 outscored multiplier plus and equity fund by 6.17% and 2.72% respectively. Similarly, the

YTD return of all 3 is negative even then the benchmark is at a better position than the funds.

From the following analysis we can infer that inspite of all the steps taken; it is not always possible

for the fund managers to always beat the market. Also, the past performance just tells the

background and history of the fund, by looking at it we cannot interpret that the fund will

perform in the same way in the future too. The datas can be presented in the form of a

graph as follow:

48

Quantitative data:

Ratios Magnum equity fund Magnum multiplier plus

Standard deviation 26.00% 26.90%

Beta 0.96% 0.95%

r-squared

0.84%

Sharpe ratio 1.46% 1.42%

Portfolio turnover 31% 25%

Total expense ratio 2.5% 2.5%

Analysis:

We can see that the standard deviation of both the funds are more or less same even then the

S.D of multiplier plus is greater than that of equity fund by 0.90%. Generally higher the SD

higher is the risk and vice-versa. Therefore, magnum multiplier plus is riskier than magnum

equity fund.

The beta of magnum equity fund is higher than that of magnum multiplier plus. Therefore,

equity fund is more volatile than multiplier plus. But beta of both the funds is smaller than 1

that means both the funds are less volatile than the market index. As r- squared values are more

than 0.80 in both the cases, we can rely on the usage of beta for the analysis of these funds.

A look at the Sharpe ratio indicates that magnum equity has outperformed multiplier plus. A

higher Sharpe ratio of equity fund depicts that these return have been generated taking lesser

risk than the multiplier plus. It Is less volatile than the other.

R-squared of both the funds are greater than 0.80. it indicates that beta can be used as a reliable

measure to analyze the performance of these funds. Magnum equity fund’s R- squared is

higher. So its beta is more reliable.

Portfolio turnover ratio of magnum equity fund is higher than multiplier plus. It mean the

manager is frequently churning the portfolio of equity fund than of multiplier plus. It may lead

to an increase in expenses but could be ignored if could generate higher return by changing the

composition of portfolio.

Total expense ratio of both the funds are same i.e.; 2.5%

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In the form of a chart:

50

Research report

51

Objective of research;

The main objective of this project is concerned with getting the opinion of people

regarding mutual funds and what they feel about availing the services of financial

advisors.

I have tried to explore the general opinion about mutual funds. It also covers why/ why

not investors are availing the services of financial advisors.

Along with it a brief introduction to India’s largest financial intermediary, KARVY has

been given and it is shown that how they operate in mutual fund deptt

Scope of the study:

The research was carried on in the Eastern Region of India. It is restricted to Kolkata where it has got

11 branch offices and 3 franchisees. I have visited people randomly nearby my locality, different

shopping malls, small retailers etc.

Data sources:

Research is totally based on primary data. Secondary data can be used only for the reference. Research

has been done by primary data collection, and primary data has been collected by interacting with

various people. The secondary data has been collected through various journals and websites and some

special publications of KARVY.

Sampling:

Sampling procedure:

The sample is selected in a random way, irrespective of them being investor or not or availing

the services or not. It was collected through mails and personal visits to the known persons, by

formal and informal talks and through filling up the questionnaire prepared. The data has been

analyzed by using the measures of central tendencies like mean, median, mode. The group has

been selected and the analysis has been done on the basis statistical tools available.

Sample size:

The sample size of my project is limited to 200 only. Out of which only 135 people attempted

all the questions. Other 65 not investing in MFs attempted only 2 questions.

Sample design:

52

Data has been presented with the help of bar graph, pie charts, line graphs etc.

Limitation:

Time limitation.

Research has been done only at Kolkata.

Some of the persons were not so responsive.

Possibility of error in data collection.

Possibility of error in analysis of data due to small sample size.

53

Data analysis:

Have you ever invested/ interested to invest in mutual funds?

YES 135

NO 65

.what is the most important reason for not investing in mutual funds? (only for above 65 participants)

Lack of knowledge about mutual funds 25

Enjoys investing in other options 10

Its benefits are not enough to drive you for

investment

18

No trust over the fund managers 12

54

.where do you find yourself as a mutual fund investor?

Totally ignorant 28

Partial knowledge of MFs 37

Aware of only scheme in which invested 46

Good knowledge of MFs 24

55

.where from you purchases mutual funds?

Directly from the AMCs 33

Brokers only ( large intermediaries) 28

Broker/ sub-brokers 59

Other sources 15

Which feature of the mutual funds allure you most?

Diversification 42

Professional management 29

Reduction in risk and transaction cost 34

Helps in achieving long term goal 30

56

According to you which is the most suitable stage to invest in mutual funds?

Young unmarried stage 55

Young Married with children stage 32

Married with older children stage 21

Pre retirement stage 27

57

Are you availing the services of personal financial advisors?

Yes 87

No 48

Which expertise of the personal financial advisor is demanded most?

58

Portfolio review & investment

recommendation

43

Planning to achieve specific financial goals 35

Managing assets in retirement 30

Access to specialists in areas such as tax

planning

27

What is the major reason for using financial advisors?

Want help with asset allocation 42

Don’t have enough time to make own

decision

23

To explain various investment options 37

Want to have surety about financial goals 33

59

What is the major reason for not using financial advisor?

Have access to all resources needed 18

Believe advisors are too expensive 53

Unsure how to find a trustworthy advisor 21

Want to be in control of own investments 43

60

Research findings and conclusions:

At the survey conducted upon 200 people, 135 are already mutual fund investors or are

interested to invest in future and the remaining 65 are not interested in it. So there is enough

scope for the advisors to convert those 65 participants into investors through their convincing

power and great communication skills.

Now, when those 65 people were asked about the reason of not investing in mutual funds,

then most of the people held their ignorance responsible for that. They lacked knowledge and

information about the mutual funds. Whereas just 10 people enjoyed investing in other

option. For 18 people, the benefits arousing from these investments were not enough to drive

them for investment in MFs and 12 people expressed no trust over the fund managers’

decision. Again the financial advisors can tap upon these people by educating them about

mutual funds.

Out of the 135 persons who already have invested in mutual funds/ are interested to invest,

only 18% have sound knowledge of MFs, 34% people are aware of only the schemes in

which they have invested. 27% possess partial knowledge whereas 21% stands nowhere in

knowledge about MFs.

33 participants buy forms directly from the AMCs, 28 from brokers only, 55 from brokers

and sub-brokers even then 15 people buy from other sources. The brokers and sub brokers

have the maximum reach so they should try to make those investors aware f the happenings,

even the AMCs should follow it.

61

When asked about the most alluring feature of MFs, most of them opted for diversification,

followed by reduction in risk, helps in achieving long term goals and helps in achieving long

term goals respectively.

Most of the investor preferred to invest at a young unmarried stage. Even 32 persons were

ready to invest at a stage of young married with children but person with older children avoid

investing due to increased expenses. But again the number rose to 27 at pre-retirement stage.

Out of them 87 were already availing the services of financial advisors whereas 48 didn’t.

When asked about the expertise of financial advisors which they liked most? 43 of them

favored portfolio review and investment recommendation, followed by planning to achieve

long term goals, managing assets in retirement and access to specialists in area such as tax

planning.

42 participants regarded asset allocation as the major reason for going for financial advisors.

37 of them needed them to explain them the various investment options available.33 of them

wanted to make sure that they were saving enough to meet their financial goals. While just 23

gave the reason- lack of time.

When asked about one reason for not availing the services of financial advisors, about 53 of

them pointed the advisors as expensive. 43 of them wished to be in control of their own

assets.21 of them said that they find it difficult to get trustworthy advisors. Whereas 18 of

them said they have access to all the necessary resources required.

Recommendations:

The most vital problem spotted is of ignorance. Investors should be made aware of the benefits.

Nobody will invest until and unless he is fully convinced. Investors should be made to realize that

ignorance is no longer bliss and what they are losing by not investing.

Mutual funds offer a lot of benefit which no other single option could offer. But most of the people

are not even aware of what actually a mutual fund is? They only see it as just another investment

option. So the advisors should try to change their mindsets. The advisors should target for more and

more young investors. Young investors as well as persons at the height of their career would like to

go for advisors due to lack of expertise and time.

The advisors may try to highlight some of the value added benefits of MFs such as tax benefit, rupee

cost averaging, and systematic transfer plan, rebalancing etc. these benefits are not offered by other

62

options singlehandedly. So these are enough to drive the investors towards mutual funds. Investors

could also try to increase the spectrum of services offered.

Now the most important reason for not availing the services of advisors was spotted was being

expensive. The advisors should try to charge a nominal fee at the beginning. But if not possible then

they could go for offering more services and benefits at the existing rate. They should also maintain

their decency and follow the code of ethics so that the investors could trust upon them. Thus the

advisors should try to attract more and more persons and turn them into investors and finally their

clients.

Exhibit 1

Questionnaire:

.have you invested /are you interested to invest in mutual funds?

Yes [ ] No [ ] (plz. attempt the next question)

.what is the most important reason for not investing in mutual funds?

Lack of knowledge about mutual funds [ ]

Enjoys investing in other options [ ]

Its benefits are not enough to drive you for investment [ ]

No trust over the fund managers [ ]

.where do you find yourself as a mutual fund investor?

Totally ignorant [ ]

Partial knowledge of mutual funds [ ]

63

Aware only of any specific scheme in which you invested [ ]

Fully aware [ ]

.where from you purchase mutual funds?

Directly from the AMCs [ ]

Brokers only [ ]

Brokers/ sub-brokers [ ]

Other sources [ ]

.which feature of the mutual funds allure you most?

Diversification [ ]

Professional management [ ]

Reduction in risk and transaction cost [ ]

Helps in achieving long term goals [ ]

. According to you which is the most suitable stage to invest in mutual funds?

Young unmarried stage [ ]

Young Married with children stage [ ]

Married with older children stage [ ]

Pre-retirement stage [ ]

. are you availing the services of personal financial advisors?

YES [ ] NO [ ]

.which expertise of the personal financial advisor is demanded most?

Portfolio review & investment recommendation [ ]

Planning to achieve specific financial goals [ ]

Managing assets in retirement [ ]

64

Access to specialist in areas such as tax planning [ ]

.what is the major reason for using financial advisors?

Want help with asset allocation [ ]

Don’t have time to make my own investment decision [ ]

To explain various investment options [ ]

Want to make sure I am investing enough to meet my financial goals [ ]

.what is the major reason for not using financial advisor?

Have access to all resources needed to invest on own [ ]

Believe advisors are too expensive [ ]

Unsure how to find a trustworthy advisor [ ]

Want to be in control of own investment [ ]

Bibliography:

Websites:www.the-finapolis.com

www.karvy.com

www.mutualfundsindia.com

www.valueresearchonline.com

www.moneycontrol.com

www.morningstar.com

www.yahoofinance.com

www.theeconomictimes.com

www.rediffmoney.com65

www.bseindia.com

www.nseindia.com

www.investopedia.com

journals & other references:

Karvy –the finapolis

Karvy- business associates manual

The Economic Times

Business Standard

The Telegraph

Business India

Fact sheet and statements of various fund houses.

66