Risk Analysis-And Risk Return Report

8/13/2019 Risk Analysis-And Risk Return Report

1/89

ANALYSIS ON RISK-RETURN RELATIONSHIP

OF MUTUAL FUNDS

Data provided here is not aso!"te # its on!$ %or re%eren&e

1


2/89

'HAPTER -() INTRODU'TION

) NEED FOR THE STUDY

) O*+E'TI,ES

) METHODOLOY

) LIMITATIONS OF THE STUDY

2


3/89

INTRODUCTION

MUTUAL FUND

A mutual fund is an entity that pools the money from many investors to invest

in different securities. It 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 may be in shares, debt securities, money

market securities or a combination of these. Those securities are professionally

managed on behalf of the unit holders, and each investor holds a pro rata share of the

portfolio he is entitled to any profits when the securities are sold, but subject to any

losses in value as well.

The investors in proportion to their investment 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

reuired to be registered with !ecurities and "#change $oard of India %!"$I& which

regulates securities markets. $efore it can collect funds from the public. The small

savings of all the investors are put together to increase the buying power and a

professional manager is hired to invest and monitor the money. Any body with an

investible surplus with as little as a few thousand rupees can invest in mutual funds.

"ach mutual funds scheme has a defined investment objective and strategy.

A mutual fund's business is to act as an (important vehicle for bringing

wealth holders and deficit units together indirectly). 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.

*


4/89

Investments in securities are spread across a wide cross+section of industries

and sectors and thus the risk is reduced. iversification reduces the risk because all

stocks may not move in the same direction in the same proportion at the same time.

-utual fund issues units to the investors in accordance with uantum of money

invested by them. Investors of mutual funds are known as unit holders.

NEED FOR THE STUDY

!avings will enable an investor to think about where to invest, what are the

investment opportunities available and what type of alternatives will yield goodreturns to his investment.

-utual fund is one of the alternatives available to the investor today and they

are offering fruitful returns with some e#tent of safety. $ut the large number and

variety of funds available in the market also poses a challenge to the invester in

selection of right fund that meets one's investment needs.

ue to fall in interest rates, the investors are going for those options of

investment, which yield high returns with some e#tent of safety. !o it is very essential

for an investor to know about the present trend of mutual fund industry to invest in the

mutual fund.

hat important consideration should be kept in mind while selecting a fund/

It's past performance/ It's past performance over long term and short term or it's

costs/ It's volatility/ !o how should one identify the right fund/ The degree of risk

involved is also one of the major constraints, which one should keep in mind while

investing.

0


5/89

O*+E'TI,ES OF THE STUDY

To understand the general concepts of mutual fund frame work.

To e#amine the effect of systematic investment diversification of investment on

the risk profile.

To analy3e the risk return relationship of the chosen funds of I4I4I 5rudential.

Importance of portfolio management

To analy3e and assist in the selection of the right investment option.

4omparing the performance of various funds with I4I4I 5rudential

To summari3e and suggest wherever necessary.

6


6/89

METHODOLOY

The study regarding the (Ana!$sis o% Ris.-Ret"rn Re!ationship o% M"t"a!

F"nds) is one of the most significant topics in the present days. The main theme

behind selecting this topic is to know the returns on the funds. The -ethodology of

the study is to create awareness about the important of the mutual funds in the various

investment avenues available.

The information for this project was mainly obtained through

5rimary ata

!econdary ata

(/ The pri0ar$ data

The primary data has been collected through the corresponding staff of the

company, various Asset -anagement companies and various fact sheets available in

our company.

1/ The se&ondar$ data

The secondary data mainly consists of the news letter regarding the -utual

7und operations, Investor guidance program, $ulletin and various websites related to

the -utual 7und 4ompanies.

eb sites8+

www.icici59:.com

www.bseindia.com

;
http://www.icicipru.com/http://www.bseindia.com/http://www.icicipru.com/http://www.bseindia.com/


7/89

LIMITATIONS

Time duration of < weeks has been a major constraint in doing a comprehensive

study.

ata reuired is very comple# due to continual revision of portfolios.

4omple#ity and confidentiality of the company is also a limitation for the study.

=


8/89

'HAPTER -1

INDUSTRY PROFILE

'OMPANY PROFILE


9/89

INDUSTRY PROFILE

ORIIN AND RO2TH OF MUTUAL FUNDS

In 1


10/89

3(446 7 (445:-In 1??*, the mutual fund industry was opened to private sector

players, both Indian and foreign. !"$I's first set of regulations for the industry were

formulated in 1??*, and substantially revised in 1??;. !ignificant innovations in

serving product design and information disclosure happened in this phase, mostly

initiated by private sector players.

3(445 7 (444: - The implementation of the new !"$I regulations and the

restructuring of the mutual fund industry led to rapid asset growth. $ank mutual funds

were re+cast according to !"$I recommended structure, and :TI came under

voluntary !"$I supervision.

3(444 7 1;;6: -This phase was marked by very rapid growth in industry and

significant increase in market shares of private sector players. Assets crossed

9s.1,@@,@@@ crores. The ta# break offered to mutual funds in 1??? created arbitrage

opportunities for a number of institutional players. $ond funds and liuid funds

registered the highest growth in this period, accounting for nearly ;@ D of the assets.

:TI's share of the industry dropped to nearly 6@D during this provide.

.

1@


11/89

RE'ENT TRENDS AND FUTURE S'ENARIO

3Re&ent Trends:-

7or investors who cannot track the market on a very active basis, and want to availe#pertise of professional fund managers, euity mutual funds are a good option toe#ploit the euity opportunity. After a dismal performance in 2@@1 C 2@@2, euity

funds has a good run with top funds giving returns in double digits last year.

TOP (; PLAYERS


12/89

forward, it is believed that markets will see a broad rally Bne should

build a portfolio of large cap and small cap funds to diversify risk and

ma#imi3e return.

RO2TH IN ASSETS UNDER MANAEMENT

The graph indicates the growth of assets over the years.

Note: "rstwhile :TI was bifurcated into :TI -utual 7und and the !pecified:ndertaking of the :nit Trust of India effective from 7ebruary 2@@*. The Assets

under management of the !pecified :ndertaking of the :nit Trust of India has

therefore been e#cluded from the total assets of the industry as a whole from 7ebruary

2@@* onwards.

12


13/89

STRU'TURE OF INDIAN MUTUAL FUND INDUSTRY

The structure of mutual funds in India is governed by !"$I %mutual fund&

regulations, 1??; %herein after referred to as !"$I regulations&. These regulations

make it mandatory for mutual funds to have a three+tier structure of sponsor trustee

A-4. The sponsor is the promoter of the mutual fund, and appoints the trustees. The

trustees are responsible to the investors in the mutual fund, and appoint the A-4 for

managing the investment portfolio. The A-4 is the business face of the mutual fund,

as it manages all the affairs of the mutual fund. The mutual fund and the A-4 have to

be registered with !"$I whose regulations also provide for who can be a sponsor,

trustee and A-4, and specify the format of agreements between these entities. These

agreements provide for the rights, duties and obligations of these three entities.

SPONSOR

The sponsor is the promoter of the mutual fund. The sponsor establishes the

mutual fund and registers the same with !"$I. The following are the points to be

noted of a sponsorH

!ponsor is the promoter of the fund.

!ponsor creates the A-4 and Trustee 4ompany and appoints the boards of both these

companies, with !"$I approval.

The !ponsor contributes the A-4's capital

!ponsor should have at least a 6+year track record in the financial services business

and should have made profit in at least * out of the 6 years.

!ponsor should contribute at least 0@ D of the capital of the A-4.

!ponsor and the custodian cannot be the same entity.

1*


14/89

TRUSTEE

The mutual fund, which is a trust, is managed either by a trust company or a board oftrustees. The following are the points to be noted of a trusteeH

The mutual funds are formed as a trust in India, and not as a company.

In the :! mutual funds are formed as investment companies.

5rovisions of the Indian Trust Act govern the board of trustees and Trust companies.

If the trust is a company, it is subject to the provisions of the Indian companies Act.

The A-4 and other functionaries are functionally accountable to the trustees.

The sponsor with !"$I approval appoints the trustees

At least 2* of the trustees should be independent.

Trustee 4ompany and A-4 are usually private limited companies.

Trustees are reuired to meet at least 0 times a year to review the A-4.

ASSET MANAEMENT 'OMPANY < AM'=

The A-4 is usually a private limited company, in which the sponsors and their

associates or joint venture partners are shareholders. The following are the points to

be noted of a A-4H

The A-4 has to be a !"$I registered entity.

The A-4 should have a minimum net worth of 9!. 1@ crore

At least J of the A-4's $oard should be of independent members.

An A-4 cannot engage in any business other than portfolio advisory and

management.

An A-4 of one fund cannot be trustee of another fund.

A-4 signs an investment management agreement with the trustees.

If two A-4's merge8 high court, !9$I and trustee approval is needed.

ORANI>ATION OF A MUTUAL FUND

10


15/89

There are many entities involved and the diagram below illustrates the

organi3ational set up of a mutual fundH

16


16/89

2ORKIN OF A MUTUAL FUND

A -utual 7und 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 reali3ed are shared by

its unit holders in proportion to the number of units owned by them. Thus a -utual

7und 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 fundH

1;


17/89

FORMS OF MUTUAL FUNDS

-utual funds are structured in the following waysH

3'o0pan$ For0:+ In the :! mutual funds are formed as investment

companies, in which investors hold shares of the mutual fund. In this structure,

management of the fund is in the hands of an elected board, which in turn appoints

investment managers to manage the funs.

3Tr"st %or0H+ The mutual fund is formed as trust in India, in which the funds of

the investors are held by a trust, on behalf of the investors. The trust appoints

investment managers and monitors their functioning, in the interest of investors.

1=


18/89

'OMPANY PROFILE

1


19/89

I'I'I 'OMPANY PROFILE

The joint venture was formed with the key objective of providing the Indian

investor mutual fund products to suit a variety of investment needs. The A-4 has

already launched a range of products to suit different risk and maturity profiles.

I4I4I 5rudential Asset -anagement 4ompany imited has a net worth of about

9s.


20/89

5rudential was founded in 1?0 providing a wide range of savings products for the individual

including life insurance, 5ensions, annuities, unit trust and personal banking. It has a

presence in over 16 countries and caters to more than 26 million customers. It

manages assets of over :!L026%9s.2@;1@?0 crores appro#.&

5rudential is one of the largest :> insurance companies with operations in 12

countries across in Asia. Asia has always has been an important region for 5rudential,

and it has had a presence in Asia for over


21/89

I4I4I td %since it -erge into I4I4I $ank td& was established in 1?66 by the

world $ank, the government of India and the India industry, to promote the industrial

development of India by providing project and corporate finance to Indian industry.

I4I4I $ank is India's second Clargest bank with total assets of about 9s.1 trillion

and a network of about 60@ branches and offices and over 1,@@@ AT-'s. I4I4I $ank

offers a wide range of banking products and financial services to corporate and retail

customers through a variety of delivery channels and through its speciali3ed

subsidiaries and affiliates in the areas of investment banking, life and non+life

insurance, venture capital, asset management and information technology.

I4I4I bank was originally promoted in 1??0 by I4I4I imited, an Indian financial

institution, and as its wholly owned subsidiary. I4I4I's shareholding in I4I4I bank

was reduced to 0;D through a public offering of shares in India in the fiscal year

1??


22/89

5rudential I4I4I Trust imited, a company incorporated under the companies

Act, 1?6; is the Trustee, to the fund wide trust deed dated August 26, 1??* as

amended from time to time. 5rudential corporation holdings limited, :>. holds 66D

of the shares of the Trustee, whereas the balance 06D share holding of the trustee

company is being held by erstwhile I4I4I and is under a process of being transferred

to I4I4I td.

MANAEMENT OF THE ASSET MANAEMENT 'OMPANY

I4I4I asset management company td., a company registered under the

companies Act, 1?6; was established by I4I4I as its wholly owned subsidiary, to act

as the investment manager of the I4I4I mutual fund through the investment

management agreement dated !eptember *, 1??*. 4onseuent to a review of long

term business strategy of the A-4, it was decided to further strengthen its

commitment to the individual investor segment. As a part of this plan, 5rudential plc

of the :> through its wholly owned subsidiary, 5rudential corporation holdings

imited, has been issued and allotted shares aggregating 66D stock in the share

capital of A-4. I4I4I holds the balance 06D share holdings in the A-4. The A-4was approved by !"$I to act as the investment managers of I4I4I mutual fund vie its

letter no II-A95 -7 22*6; dated Bctober 12, 1??*. 4onseuent to the

restructuring of share holding pattern as stated above, !"$I through its letter no .

II-A95 ;* ?< dated -arch 11, 1??< accorded its approval for the induction of

5rudential corporation plc %through its wholly owned subsidiary, 5rudential

corporation holdings imited&.

Str"&t"re o% I'I'I PRU

22


23/89

MANAEMENT TEAM

5ankaj ra3dan C managing irector

ider turpin 7 eputy 4"B

Eilesh shah C 4hief Investment Bfficer

5 F 9 5rasad C Bperations

Pasant !an3giri C !r. P.4. Gead Guman 9esource

Eagarjuna + !r. Pice 5resident 7inance

2*


24/89

*USINESS FO'US

UIDIN PRIN'IPLES OF I'I'I PRU

Gonesty and trustworthiness in all interactions.

A pioneering spirit and e#cellence in action.

4ollaboration and team work.

An understanding of customer needs and the desire to satisfy them.

The highest service standards.

A consistently above average performance.

I4I4I 59: B5"9ATIEF 59IE4I5"!

R 9espect value people, culture, differences contributions.

E "ncourage an open honest environment

S !upport the company, our colleagues, our customers and community.

5 5ractice what we preach and be a role model for the operating principles.

E "njoy the company of our colleagues, our work and have fun.

' 4ommitted to listening to our colleagues and customers.

T Trust others and be Trustworthy.

20


25/89

IN,EST 'ARE AND MUTUAL FUNDS

IN,ESTOR EDU'ATION

-utual 7unds have been considered a good route to invest and earn returns

with reasonable safety .!mall and big investors have both invested in instruments that

have suited their needs. and so euity and debt funds have attracted investments alike.

The performance of the investments, euity in particular ,for the last one year, hashowever been disappointing for the investors.

Till now, investor education has been one of the issues, less cared for, by

the industry. The industry focused upon the amounts and tot why a person wanted to

invest or whether a particular product suited him or not. hile educating the customer

might not have been on the cards earlier, the things are beginning to change now.

ith !"$I passing guidelines the funds will engage in investor education.

The guidelines state that funds will utili3e the invoke earned on unclaimed money

lying with them for period e#ceeding three years to educate the investors. A-7I has

started a certification program for intermediaries and is aimed at educating the

investors about the risks attached to the schemes and to inculcate adeuate skills into

the intermediaries to help the investors choose the right of fund.

I4I4I 5rudential has already made the A-7I certification programmed

compulsory for its employees it will of on to increase their efficiency. Among others,

two funds namely, >otak -ahindra and !undaram have also started taking steps to

this effect. !teps such as these are aimed at obliterating various flaws in the system by

standardi3ing the knowledge base of intermediaries, as they are the interface between

the investor and the funds.

26


26/89

METHODI'AL@SYSTEMATI'

IN,ESTMENT

7inancial independence is something were all striving for and systematic investmentis one of the best ways I know to achieve it

. +4harles !chwab.

S$ste0ati& Invest0ent vers"s One- Ti0e Invest0ent

"uity investing seems to be tricky. 5rofits uickly come and vanish even

faster. -ost investors are disillusioned bout euity investing. They do not understand

that euity investing takes a lot of discipline and a long+term approach pays

dividends. !ystematic investing involves investing a fi#ed sum regularly, say 9s1@@@.

"very month one time investing is simply investing your money at a specific time and

waits for a reasonable time, say *,6 or 1@years ,to reap the benefits of long term+

investing .9elationship of mutual funds.

!ystematic investment planning is the process of investing a small amount of

money at regular intervals of time. The big things in life are always built bit by bit. !o

also with investments, where a small amount invested regularly can amount to a lot.

!I5 would help an individual to lay down his path for his prosperous future. And

individual who wants to take proper care of his investment, !I5 would be a good

option. -ost of the times, this type of investments give better returns for the investor

than investing his money, all at once .This can be clearly understood by the below

e#ample.

et us suppose that an investor has invested 9s.1@@@+ every month for the

past 02months and another investor invested 9s.02,@@@+%lump sum&on1Q*Q2@@@ in

power plan of I4I4I 59:.

2;


27/89

EAP as on *Q1Q2@@@ K 1?.?;

EAP at the end as on 2Q;Q2@@@ K 10.?=

Eo. Bf units bought by !ystematic Investor K *21


28/89

DI,ERSIFI'ATION

iversification is the basic tenet for investment in the stock market or any other

asset class. !imilarly put, it means not putting all the eggs in one basket, !preading

risk across securities and building the portfolio with varying blocks.

iversification offers a way to reduce risk It is possible to have a diversified

portfolio ofH just stocks8 just bonds8 stocks and bonds8 or stocks, bonds, and cash etc.

The portfolio design is very important to effectively minimi3ing risk. :nsystematic

risk can be avoided by diversifying among different industries rather that just

investing in the same one. They may also be effectively mitigated by diversifying

across different asset classes such as stocks, bonds, mutual funds, real estate holdings

etc.

AD,ANTAES OF DI,ERSIFI'ATION:

-utual funds offer the benefits of diversification C but at the cost of returns. The

best mutual fund will find it difficult to outperform the best stock in the short run.-utual funds are not short return instruments. 9eturns can be superior to the market,

but not at all times.

Eo matter how well C informed you are no single fund fund manager can give

you the best returns at all times. Gence there is a need to diversify in mutual fund

investment. $ut diversification in terms of a single mutual fund is limited to

diversification within certain class of assets %say stocks& .

iversification involved dividing your investment across and within a variety of

asset categories %e.g. !tocks, bonds, and cash euivalents& . If there is a down term in

any one market this practice can help you manage risk.

The markets in which they operate their costs and the demand for their products

drive returns of various companies. These factors are not always uniform for allcompanies. 7or e.g. if you look at the sales of an Ice cream company, it will peak in

2


29/89

summer. The sales of a raincoat company will be lowest in summer, but increase

during monsoon. The sales of Ice 4ompany will fall during monsoon due to reduction

in demand. As an investor if you bought both of these companies, rain or shine, your

portfolio will be making money. This is the benefit of diversification. e know in the

markets that different sectors perform well at different points in time. It is always

better to spread the risks.

-any investors tend to believe that more the number of companies in a portfolio,

better the diversification. This is not true. The risk reduces if we e#tend the choice of

stocks from 6 to 1@. $ut there is no significant change in risk if we increase the

number of stocks from 6@ to 1@@.

!"$I regulations do not permit mutual funds to invest more than 1@D of their EAP

in a single company. This makes it compulsory for funds to have at least 1@ stocks in

their portfolio. hile most mutual funds have diversified portfolios across companies,

there may be risks arising out of concentration in few sectors. In the bouuet of euity

funds, not all have the same level of diversification. Investors should assess the return

and risk potential of the funds by e#amining these differences.

The Inde# fund is the most diversified as it simply replicates the euity inde#. In the

case of all other funds, the e#tent of diversification depends on the stated objective

and asset allocation strategy. The I4I4I 5rudential Frowth 5lan is a diversified euity

plan, which manages a portfolio that is well spread across sectors, though not

necessarily in the same proportion as the inde#. I4I4I 5rudential 5ower focuses on

the core sector and feeder industries. The strategy is not to create a sector portfolio,

but a diversified portfolio that is overweight in these identified sectors. The I4I4I

5rudential ynamic 5lan on the other hand is a sect oral fund that has company+level

diversification.

2?


30/89

'HAPTER 7 III

THEORETI'AL

*A'KROUND

*@


31/89

THEORETI'AL *A'KROUND

TYPES OF MUTUAL FUNDS

These funds are sold at the EAP based prices, generally calculated on every

business day. These schemes have unlimited capitali3ation, open+ended schemes do

not have a fi#ed maturity C i.e. there is no cap on the amount you can buy from the

fund and the unit capital can keep glowing. These funds are not generally listed on

any e#change.

*1


32/89

Open - ended %"nds:-

Bpen+ended funds are bringing in a revival of the mutual fund industry owing to

increased liuidity, transparency and performance in the new open+ended funds

promoted by the private sector and foreign players. Bpen+ended funds score over

close+ended ones on several counts. !ome of these are listed belowH

3 An$ ti0e eit option

3 Ta advantaBe

3 An$ ti0e entr$ option

The open+ended funds offered by I4I4I 59: are iuid plan, Income plan, Filttreasury, Filt investment, balanced fund, Frowth fund, Ta# plan, 7-4F fund,

Technology fund, -onthly income plan, 7i#ed maturity plan, 4hild care plan, 5ower

and short term plan.

'!ose Ended S&he0es:-

!chemes that have a stipulated maturity period, limited capitali3ation and the units are

listed on the stock e#change are called close+ended schemes.

These schemes have historically seen a lot of subscription. This popularity is

estimated to be on account of firstly, public sector -7's having floated a lot of

closed+ended income schemes with guaranteed returns and secondly easy liuidity on

account of listing on the stock e#changes.

The close+ended fund managed by I4I4I 59: is I4I4I premier.

*2


33/89

'LASSIFI'ATION A''ORDIN TO IN,ESTMENT O*+E'TI,E

3 roCth %"nds:+ The aim of growth funds is to provide capital appreciation

over the medium to long term. !uch schemes normally invest a majority of their

corpus in euities. In has been proved that returns from stocks, have outperformed

most other kind of investments held over the long term. Frowth schemes are ideal for

investors having a long+term outlook seeking growth over a period of time.

3 roCth and In&o0e %"nds: -The aim of income funds is to provide regular

and steady income to investors. !uch schemes generally invest in fi#ed income

securities such as bonds, corporate debentures and government securities. Income

funds are ideal for capital stability and regular income.

3 Fied in&o0e %"nds:- The goal of fi#ed income funds is to provide current

income consistent with the preservation of capital. These funds invest in corporate

bonds or government backed mortgage securities that have a fi#ed rate of return.

3 *a!an&ed :- These funds invest in both shares and fi#ed income securities

in the proportion indicated in their offer documents. Ideal for investors who are

looking for a combination of income and moderate growth.

3 Mone$ Mar.et %"nds Li"id F"nds:- The aim of money market funds is

to provide easy liuidity, preservation of capital and moderate income. These schemes

generally invest in safer short term instruments such as treasury bills, certificates ofdeposit, commercial paper and inter bank call money.

3 Spe&ia!t$ se&tor %"nds:- !ector funds are those which invest e#clusively

in a specified sector. This could be an industry or a group of industries or various

segments such as RA' group share or initial public offerings.

**


34/89

3 Ta savinB s&he0e: - The objective of Ta# !aving schemes is to offer ta#

rebates to the investors under specific provisions of the Indian Income Ta# aws.

Investment made under some schemes is allowed as deduction us


35/89

are declared. ividends are paid in the form of warrants, or are directly credited to the

investors' bank accounts. There are further choices in the distribution of dividend. In

a normal dividend plan, periodicity of dividends is left to the fund managers, which

may pay annual and or an interim dividend. Investors can choose the freuency of

dividend distribution that suits their reuirements. The EAP of these investors'

holdings will vary with changes in the value of the portfolio, and the impact of the

proportion income earned by the fund, to what is actually distributed as dividend.

3 roCth option: - Investors who do not reuire periodic income

distributions can choose the growth option, where the incomes earned are retained in

the investment portfolio, and allowed to grow, rather than being distributed to the

investors. Investors with long term investment hori3ons, and limited reuirements for

income, choose this option. The return to the investor who chooses a growth option is

the rate at which his initial investment has grown over the period for which he was

invested in the fund. The EAP of the investor choosing this option will vary with the

value of the investment portfolio, while the number of units held will remain constant.

3 Reinvest0ent option: - M"t"a!funds also provide another option to

investors in the form of re+investment. Investors re+invest the dividends that are

declared by the mutual fund, back into the fund itself, at EAP that is prevalent at the

time of re+investment. In this option, the number of units held by the investor will

under the dividend option. The choice of income options depends not only on theinvestor's reuirements for income and growth, but also on his ta# status. The

differential ta# treatment of dividends and capital gains will also impact the choice

made by the investor.

PRO'ESS OF IN,ESTMENT IN MUTUAL FUNDS

3 O%%er Do&"0ent:

*6


36/89

The mutual fund is reuired to file with !"$I a detailed information memorandum, in

a prescribed format that provides all information about the fund and the scheme. This

document is also called as prospectus or the offer document %B&, and is very detailed

and contains most of the relevant information that an investor would need.

The following are the points to be noted of an offer documentH

Bffer document is the most important source of information for investors.

Investors are reuired to read and understand the B

Eo recourse is available to investors for not reading the offer document, as they sign

the form stating that they have read the B.

The cover page contains the details of the scheme being offered and the names of

sponsors, trustee and A-4.

The B is very detailed and can run into 1@@ pages or more.

-andatory disclaimer clause of !"$I should also be on the cover page of B.

B is issued by A-4 on behalf of the trustees.

4losed end funds issue an B at the time of the I5B.

Bpen+ended funds have to update B at least once in 2 years.

The format and content of the B has to be as per !"$I guidelines.

The A-4 prepares the B and is responsible for the information contained in the

B.

The information in the B should be true and fair representation of facts.

!"$I doesn't approve or certify the contents of the B.

3 Ke$ in%or0ation 0e0orand"0

!ince the offer document is very detailed, it is not feasible for mutual funds to provide

them to all prospective investors. !"$I regulation allows mutual funds to summari3e

the key points in a summary document as the key information memorandum %>I-&.

The following are the points to be remembered of a >I-H

Abridged version of the B is called as >I-.

The information must be true and fair representation of facts.

*;


37/89

The offer document contains detailed information, while the >I- is summary form of

the B.

Any crucial information will be found in both >I- and B.

The name and address of trustees and A-4 directors will be found in the >I-, but

the details of their role, responsibilities and duties will be found only in the B.

In >I- and B there will be no information about other mutual funds.

3 Pro&ess o% invest0ent:-

Investors buy the units of a mutual fund. The number of units bought by an investor

represents his holdings in a mutual fund. This is usually called the sale price. 7or

e#ample, a new mutual fund scheme usually offers units at a price of 9s.1@ each. The

price is announced by the mutual fund every day, and is based on the EAP of the

fund. The investor can either buy a fi#ed number of units, or can invest a fi#ed

amount of money.

REULATION OF MUTUAL FUNDS

There was no uniform regulation for the mutual funds industry till a few years

ago. The :TI was regulated by a special Act of parliament while funds promoted by

public sector banks were subject to 9$I Fuidelines of Muly 1?


38/89

ambit, as the result the capital market regulator now regulates all schemes, with the

e#ception of unit ;0.

NET ASSET ,ALUE < NA,=

Eet Asset Palue %EAP& denotes the performance of a particular scheme of a

mutual fund. The net asset value of the fund is the cumulative market value of the

asset fund net and its liabilities. In other words, if the fund is dissolved or liuidated,

by selling off all the assets in the fund, this is the amount that the shareholders would

collectively own. This gives rise to the concepts of net asset value per unit, which is

the value, represented by the ownership of one unit in the fund. It is calculated simply

by dividing the net asset value of the fund by the number of units.

'a!&"!ation o% NA,

The most important part of the calculation is the valuation of the assets owned

by the fund. Bnce it is calculated, the EAP is simply the net value of assets divided

by the number of units outstanding. The detailed methodology for the calculation of

the asset value is given belowH

Mar.et ,a!"e o% Se&"rities G '"rrent Assets 7

'"rrent Liai!ities provisions

NA, per "nit K +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

No/ O% o"tstandinB "nits

*


39/89

THE IMPORTANT 'ON'EPTS IN MUTUAL FUNDS

The Investment 4ompany is responsible for the management of the fund.

It sells shares in the fund to individual investors.

-utual fund investors are like share holders and they own the fund.

-utual fund investors are not lenders or deposit holders in a mutual fund.

Investment professionals who earn a fee manage a mutual fund.

The money in the mutual fund belongs to investors and nobody else.

-utual funds invest in marketable securities according to the investment

objective.

The value of investments can go up or down, changing the value of the

investor holding.

The net asset value of a mutual fund fluctuates with market price

movements.

The investment portfolio of the mutual fund is created according to the stated

investment objective.

Investors hold a proportionate share of the fund in the mutual fund. Eew

investors come in and old investors can e#it at prices related to net asset value.

*?


40/89

TYPES OF MUTUAL FUNDS ISSUED *Y THE I'I'I

PRUDENTIAL MUTUAL FUNDS

$asically three types of funds issued by the I4I4I prudential mutual funds

DE*T FUNDS

iuid plan

!hort term plan

Income plan

Fift fund

7le#ible income plan

Income multiplier plan

-onthly income plan

*ALAN'ED FUNDS

$alanced fund

EUITY FUNDS

Frowth plan

Ta# plan

7-4F fund

Technology fund

ynamic plan

5ower plan

0@


41/89

MUTUAL FUND PRODU'TS OFFERED *Y I'I'I

PRUDENTIAL

Det Prod"&ts:

I'I'I PRU IN'OME PLANH+

It's ama3ing how you feel when you now your money is well looked after.

4alm, comfortable and tension free. "#actly the same sentiments e#ist when you

invest in income plan. Income plan aims at creating an ideal balance between

ma#imi3ing your returns and yet minimi3ing risk. The plan invests only in debt

securities so you don't have to worry about the volatility of the stock market, thus

ensuring your peace of mind.

I'I'I PRU ILT FUNDH+

If an investor is looking for steady returns for his hard earned money at

relatively low risk across a medium to long term hori3on, then the Filt fund endeavors

to provide him an answer. The gilt fund invests his money in government securities

and seeks to generate steady and consistent returns for him.

I'I'I PRU MONTHLY IN'OME PLANH+

9egular income month after month, so that when the monthly salary stops

after retirement/ ifestyle need not change. $ecause, now an investor can keep the

cheue coming in month by investing in monthly income plan. -onthly income plan

seeks to generate regular income and long term capital appreciation for the investor

by investing in debt and euity related securities. It is ideal if the investor's

investment hori3on is from the medium to the long term.

01


42/89

I'I'I PRU SHORT TERM PLANH+

!T5 generates income through investment in basket of debt securities and

money market instruments. This term plan helps to manage volatility while at the

same time provides scope for liuidity and returns. !uitable for investors looking for

steady returns at relatively low risk across a medium to long term hori3on.

I'I'I PRU LON TERM PLANH+

Bpen+ended income fund, Fenerates income through investments in a basket

of debt and money market instruments of various maturities with a view to ma#imi3e

income while maintaining the optimum balance of yield, safety and liuidity. !uitable

for investors looking for steady returns at relatively low risk across a medium to long

term hori3on.

I'I'I PRU FLEJI*LE IN'OME PLANH+

Bpen+ended income fund, Fenerates income through investments in a range of

debt instruments and money market instruments of various maturities with a view to

ma#imi3ing income while maintaining the optimum balance of yield, safety and

liuidity. !uitable for investors looking at avenues to invest their surplus funds in

medium to long term hori3on.

I'I'I PRU S2EEP PLANH+

Bpen+ended iuid fund, !eeks to provide reasonable returns, commensurate

with low risk while providing a high level of liuidity, through investment made

primarily in money market and debt securities. The aim here is to optimi3e returns

while providing liuidity. !uitable for investors looking for short term investment at

relatively low risk.

02


43/89

I'I'I PRU FLOATIN RATE PLANH+

Bpen+ended income fund. Fenerates income consistent with the 5rudent risk

from a portfolio comprising substantially of floating rate debt instruments, fi#ed rate

debt instruments swapped for floating rate return and also fi#ed rate instruments and

money market instruments. !uitable for investors looking at avenues to invest surplus

funds in medium term hori3on.

S *a!an&ed Prod"&ts:

I'I'I PRU 'HILD 'ARE PLAN:-

4hildren are bundles of joy. The future belongs to them. Investment in the

child care plan can make his dreams come true. An investor always want to give his

child the best his life. Gis money is invested in a carefully chosen mi# of euity and

debt instruments.

E"it$ Prod"&ts:

I'I'I PRU RO2TH PLANH+

Frowth plan seeks to generate long term capital appreciation for the investor

from a portfolio made up predominantly of euity and euity related securities. It is

an ideal investment to plan for long term needs such as saving for your retirement,

buying a house, for children's higher education, child's marriage etc.

0*


44/89

I'I'I PRU TAJ PLANH+

If an investor is looking at planning his ta#es efficiently then he should go for

ta# plan. Eot only does it save ta# under section


45/89


46/89

At I4I4I 5rudential, its single+most important goal is to listen to its

customer, understand their investment needs and respond with products and solutions

that best suit their needs.

In this process I4I4I 5rudential is offering a range of innovative service for

the convenience of its customers, a few of which are discussed belowH+

SIP SMART

!I5 helps investor to invest small amounts of money at regular intervals that

will ultimately add up to a lot in the long term. The three fold benefits of !I5 areH

U isciplines investors to save regularly rather than randomly.

U brings down the average cost per unit.

UGelps reduce risk of timing the markets by rupee cost averaging factor.

The !-A9T encashment options consists of two options namely the

automatic encashment plan and the systematic withdrawal plan. These are built into

most of our schemes. :nder these options, an investor continues to enjoy a regular

inflow of funds and that too in a ta# efficient manner.

SAFETY UOTIENT 7 %irst step toCards Cise investinB

This simple safety uotient test of I4I4I 5rudential helps the investor to find

out more above the kind of investments he should make.

!V suggests that, the thumb rule to investment is that investment in euity

should be in inverse proportion to the age i.e., if you are 0@, then ;@ D of your

investment ought to be in euity. ithin debt investor need to be clear as to whether

he is looking for the high safety of government securities through a gilt fund or the

safety of a bond fund. Ge also need to be clear as to how much or his money he would

0;


47/89

like to keep in cash. Bnce you have decided, you need to revisit it regularly because

investments are like little children that need to be nurtured.

FINAN'IAL PLANNER

hen building a long+term investment plan, it's most important to understand

yourself as an investor, your emotions, your fears, and your tolerance for risk. This

would help you choose an investment that best suits your profile and your long+term

goals. 7inancial planner is the financial calculator formulated by I4I4I 5rudential to

calculate the amount that an investor has to invest according to his future financial

needs, his risk appetite, his age, and according to his savings potential. This

mechanism has gained widespread popularity among its investors, which helps its

investors to assess their investment patterns.

IN,EST 'ARE SER,I'ES

In the process of rendering innovative services to its customers I4I4I

5rudential has taken up several steps to educate its investors and make them aware of

the various investment options available for them in mutual funds. I4I4I 5rudential in

order to help its investors to be independent and to help them live their dreams, has

taken up the activity of educating its investors through its investment care services.

The different categories under which I4I4I 5rudential is rendering these services areH

3Invest &are %or The Yo"th:-

The aspiring youth work hard for the money they earn. The challenge

now is to put that money to work as hard as they do so that they will have the

necessary ammunition to gun for those big dreams they have. epending upon

their need, I4I4I 5rudential has a range of products to help them get there. Bf

these it recommends the I4I4I 59: power and growth plan that may best suit.

0=


48/89

ith the potential to earn them good returns in the long run, they may help

them to achieve their dreams.

3 Invest &are %or 2o0enH +

omen would not like to be dependent on anyone. At the same time,

they would want their money to be secure, even if the returns are moderate. !o,

I4I4I 59: recommends them a mi# of an euity product with a judicious

blend of debt. The I4I4I 59: balanced fund and the income plan may help

women along the way to financial independence by making their money work

hard for them.

3 Invest &are %or parentsH+

"very individual's primary objective is to ensure that their parents get a

steady income and at the same time ensure that their investments are relatively

safe and strives to generate decent returns. I4I4I 59: has a basket of offerings

from which they recommend I4I4I 59: income plan and monthly income

plan %an open+ended income fund with no assured returns& that might be the

most relevant investment solutions for any individual parents.

3 Invest &are %or retire0ent:-

uring the golden year, individuals paramount investment needs are

safety with moderate returns' coupled with a steady income. !o, depending

upon investors needs, I4I4I 59: have a range of financial solutions like the

I4I4I 59: income plan and monthly income plan that would be just right for

retiring investors. These schemes may help an investor to plan better for his

retirement.

0


49/89

*ENEFITS OF IN,ESTIN THROUH MUTUAL FUND

Diversi%i&ation: -A single mutual fund can hold securities from hundreds or even

thousands of issuers, far more than most investors could afford on their own. This

diversification sharply reduces the risk of a serous loss due to problems in a particular

company or industry.

Pro%essiona! invest0ent 0anaBe0ent: -7ew investors have the time or e#pertise to

manage their personal investments every day, to efficiently reinvest interest or

dividend income, or to investigate the thousands of securities available in the financial

markets. They prefer to rely on a mutual fund's investment adviser. ith access to

e#tensive research, market information, and skilled securities traders, the adviser

decides which securities to buy and sell for the fund.

Li"idit$: - share in a mutual fund can be bought and sold nay business day, so

investors have easy access to their money. hile mny individual securities can also

be bought and sold readily, others aren't widely traded. In those situations, it could

take several days or even longer to build or sell a position.

'onvenien&e: - -utual funds offer services that make investing easier. 7und shares

can be bought or sold by mail, telephone, or the internet. !o one can easily move their

money from one fund to another as their financial needs change. -ost major fund

companies offer e#tensive record keeping services to help them track their

transactions, complete their ta# returns, and follow their fund's performance.

LoC &ost: - A mutual fund let's an investor participate in a diversified portfolio for

as little as 9s.6@@@+, and sometimes less. and with a no+ load fund, one can pay

little or no sales charges to own them.

'onvenien&e and %!eii!it$: -Bwn jest one security rather than many, yet enjoy the

benefits of a diversified portfolio and a wide range of services. 7und managers decide

0?


50/89

what securities to trade collect the interest payments and see that ones dividends on

portfolio securities are received and the rights e#ercised. It also uses the services of a

high uality custodian and registrar in order to make sure that your convenience

remains at the top of the mind.

Persona! servi&es: -Bne call puts an investor in touch with a specialist who can pride

him with information he can use to make his own investment choices. They will

provide him personal assistance in buying and selling his fund units, provide fund

information and answer uestions about his account status.

Transparen&$: -Bne can get regular information on the value of their investment in

addition to disclosure on the specific investment made by the mutual fund scheme.

'onvenient ad0inistration: -investing in a mutual fund reduces paper work andhelps an investor to avoid many problems such as bad deliveries, delayed payments

and follow up with brokers and companies. -utual funds save time and makeinvesting easy and convenient.

Ret"rn potentia!: -Bver a medium to long C term, mutual funds have the potential to

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

A%%ordai!it$: - 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.

'hoi&e o% s&he0es: --utual funds offer a family of schemes to suit your varying

needs over a lifetime.

2e!! reB"!ated: -All mutual funds are registered with !"$I and they function within

the provisions of strict regulations designed to protect the interest of investors. The

operations of mutual funds are regularly monitored by !"$I.

6@


51/89

DISAD,ANTAES

As with any investment, mutual funds come with some caveats, vi3.

No B"arantees: - -utual funds are regulated by the !ecurities and "#change

4ommission %!"4&, which reuires funds to disclose the information an investor

needs to make sound decisions. :nlike bank deposits, mutual fund shares are not

insured or guaranteed by the 7ederal eposit Insurance 4orporation %7I4& or any

other agency of the government. In fact, the value of a mutual fund may fluctuate,

even if the fund invests in government securities.

Diversi%i&ation pena!t$:- while diversification eliminates the risk of loss that

would occur if an investor owns a single security whose value plummets, it also limits

the potential for making a killing the market if that security's value shoots up. It's

important to note that diversification does not protect investors from a loss caused by

an overall decline in financial markets.

Potentia!!$ hiBh &osts: -mutual funds can be a lower Ccost way to invest when

compared with buying individual securities through a broker. Gowever, a combination

of sales commissions and high operating e#penses at some fund companies will

reduce your investment returns. 4ompare the costs of mutual funds. Gigh costs can

badly damage the returns you receive as a shareholder.

Ta i0pa&t: -the profits on a mutual fund investment are typically subject to federal

%and often, state and local& income ta# unless one is investing through a ta# C free

retirement or education account. If an investor invests in a regular ta#able account,

then ta#able interest distributions you receive are ta#ed as ordinary income each year.

No tai!or 0ade port%o!ios: --utual funds portfolios are created and marketed by

A-4's, into which investors invest. They cannot create tailor made portfolios.

61


52/89

Pro!e0 o% 0anaBinB a !arBe port%o!io o% %"nds: -As the numbers of mutual funds

increase, in order to tailor a portfolio for him self, an investor may be holding a

portfolio of funds, with the costs monitoring them and using them, being incurred by

him.

62


53/89

PERFORMAN'E E,ALUATION MEASURES OF

MUTUAL FUNDS

Re!ative-to *en&h0ar. 0ethod

:nder this method, a comparison is made between the returns given by a market

inde# and the fund over a given period of time. If the returns generated by the fund %as

measure by changes in EAP over that given period of time& are greater than those

generated by the benchmark, then the fund is said to have outperformed the market

portfolio.

Ris.-Ret"rn 0ethod

-utual 7und industry today, with about *0 players and more than five hundred

schemes, is one of the most preferred investment avenues in India. Gowever, with a

plethora of schemes to choose from, the retail investor faces problems in selecting

funds. 7actors such as investment strategy and management style are ualitative, but

the funds record is an important indicator too. Though past performance alone cannot

be indicative of future performance, it is, frankly, the only uantitative way to judge

how good a fund is at present. Therefore, there is a need to correctly assess the past

performance of different mutual funds.

9eturn alone should not be considered as the basis of measurement of the

performance of a mutual fund scheme, it should also include the risk taken by the

fund manager because different funds will have different levels of risk attached to

them. 9isk associated with a fund, in a general, can be defined as variability or

fluctuations in the returns generated by it. The higher the fluctuations in the returns of

a fund during a given period, higher will be the risk associated with it. These

fluctuations in the returns generated by a fund are.

6*


54/89

Need For Eva!"ation o% Ris. Ret"rn Method

Vuite freuently small investors feel insecure in managing their own

investment in securities because they consider themselves inadeuate to perform this

delicate task successfully. Bften they feel that they lack education, background, time,

foresight, resources and the temperament to carry out the proper handling of their

portfolio. The logical step they then take is to turn the job over to a professional

portfolio manager. -ost often, the portfolio manager chosen takes the form of a

-utual 7und or Investment 4ompany where managers trained in the techniues of

security analysis devote their full time meeting the fund's investment objectives. This

permits a constant monitoring of the securities comprising the portfolio. 7urthermore,

large amounts of money entrusted to the 7und enables it to be diversified in

investments across industries and securities to an e#tent not possibly achieved by the

average investor. This diversification evolves as a result of stated objectives of the

7und.

9isk and return are most important concepts in finance. In fact, they are the

foundation of the modern finance theory. These are the concepts, which are basic to

the investment decisions of the investors. 9isk can simply be defined as the variability

of returns but to understand the relationship between risk and return in case of mutual

funds, it is e#tremely important to understand the nature and the different kinds of its

measurement.

The Tre$nor Meas"re

eveloped by Mack Treynor, this performance measure evaluates funds on the

basis of Treynor's Inde#. This Inde# is a ratio of return generated by the fund over

and above risk free rate of return %generally taken to be the return on securities backed

by the government, as there is no credit risk associated&, during a given period and

systematic risk associated with it %beta&. !ymbolically, it can be represented asH

60


55/89

TreynorWs Inde# %Ti& K %9i+9f&$i.

here, 9i represents return on fund, 9f is risk free rate of return and $i is beta of the

fund.

All risk+averse investors would like to ma#imi3e this value. hile a high and

positive TreynorWs Inde# shows a superior risk+adjusted performance of a fund, a slow

and negative TreynorWs Inde# is an indication of unfavorable performance.

The Sharpe Meas"re

In this mode, performance of a fund is evaluated on the basis of !harp 9atio,

which is a ratio of returns generated by the fund over and above risk free rate of return

and the total risk associated with it. According to !harp, it is the total risk of the fund

that the investor is concerned about. !o, the model evaluated funds on the basis of

reward per unit of total risk. !ymbolically, it can be written asH

!harp Inde# %!i& K %9i+9f&!i

here, !i is standard deviation of the fund.

9esultant of two guiding forces. 7irst, general market fluctuations, which

affect all the securities, present in the market, called market risk or systematic risk and

second, fluctuations due to specific securities present in the portfolio of the fund,

called unsystematic risk. The Total 9isk of a given fund is sum of these two and is

measured in terms of standard deviation of returns of the fund. !ystematic risk,. Bn

the other hand, is measured in terms of $eta, which represents fluctuations in the

EAP of the fund vis+X+vis market. The more responsive the EAP of a mutual

fund is to the changes in the market8 higher will be its beta. $eta is calculated by

relating the returns on a mutual fund with the returns in the market. hile

unsystematic risk can be diversified through investment s in a number of instruments,

systematic risk cannot. $y using the risk return relationship, we try to assess the

competitive strength of the mutual funds vis+X+vis one another in a better way.

66


56/89

In order determine the risk+adjusted returns of investment portfolios, several

eminent authors have worked since 1?;@s to develop composite performance indices

to evaluate a portfolio by comparing alternative portfolios within a particular risk

class. The most important and widely used measures of performance areH

The Treynor -easure

The !harpe -easure

Menson -odel

7ama -odel

hile a high and positive !harpe 9atio shows a superior risk+adjusted

performance of a fund, a low and negative !harpe 9atio is an indication of

unfavorable performance.

'o0parison o% Sharpe and Tre$nor

!harpe and Treynor measures are similar in a way, since they both divide the

risk premium by a numerical risk measure. The total risk is appropriate when we are

evaluating the risk return relationship for well+diversified portfolios. Bn the other

hand, the systematic risk is the relevant measure of risk when we are evaluating less

than fully diversified portfolios or individual stocks. 7or a well+diversified portfolio

the total risk is eual to systematic risk. 9ankings based on total risk %!harpe

measure& and systematic risk %Treynor measure& should be identical for a well+

diversified portfolio, as the total risk is reduced to systematic risk. Therefore, a poorly

diversified fund that ranks higher on Treynor measure, compared with another fundthat is highly diversified, will rank lower on sharpe -easure.

+enson Mode!

MesonWs model proposes another risk adjusted performance measure. This

measure as developed by -ichael jenson and is sometimes referred to as the

ifferential 9eturn -ethod. This measure involves evaluation of the returns that the

fund has generated vs. the returns actually e#pected out of the fund given the level of

6;


57/89

its systematic risk. The surplus between the two returns is called Alpha, which

measures the performance of a fund compared with the actual returns over the period.

9euired return of a fund at a given level of risk %$i& can be calculated as8

9i K 9fY$i %9m+9f&

here, 9m is average market return during the given period. After calculating

it, alpha can be obtained by subtracting reuired return from the actual return of the

fund.

Gigher alpha represents superior performance of the fund and vice versa.

imitation of this model is that it considers only systematic risk not the entire risk

associated with the fund and an ordinary investor can not mitigate unsystematic risk,

as his knowledge of market is primitive.

Fa0a Mode!

The "ugene 7ama model is an e#ptension of Menson model. This model

compares the performance, measure in terms of returns, of a fund with the reuire

return commensurate with the total risk associated with it. The difference between

these two is taken as a measure of the performance of the fund and is called net

selectivity.

The net selectivity represents the stock selection skill of the fund manager, as

it is the e#cess return over and above the return reuired to compensate for the totalrisk taken by the fund manager. Gigher value of which indicated that fund manager

has earned returns well above the return commensurate with the level of risk taken by

him.

9euired return can be calculated asH 9i K 9f K !i %9m+9f&

6=


58/89

here, !m is standard deviation of market returns. The net selectivity is then

calculated by subtracting this reuired return from the actual return of the fund.

'HAPTER 7 ,

ANALYSIS

AND INTERPRETATION

6


59/89

The table below shows how the sector allocations of various I4I4I 5rudential

schemes ensure that the portfolio is diversified, but is overweight or underweight in

different sectors, depending on the objective of the fund.

Per&entaBe ho!dinB 7 as Apri! 1;;9

Se&tor I'I'I PRU

roCth P!an

I'I'I PRU PoCer I'I'I D$na0i&

P!an

Industrial C4apital Foods 1*.62D 12.@;D


60/89

PERFORMAN'E OF INDI,IDUAL SE'TORS IN INDIA

'o0parison o% *SE Sense ,s/ *SE IT

COMPARISION BETWEEN BSE

SENSEX AND BSE IT

0200040006000

800010000120001400016000

2000

2001

2002

2003

2004

2005

2006

2007

year

s

ensex

sensex

bse it

Ana!$sis:

The IT industry has been one of the fastest growing industries in India and it

occupies a very important position in the national economy. The domestic demand for

software solution showed an increase by 0D in 7O2@@; to 1.6


61/89

'o0parison o% *SE Sense ,s/ *SE 'D

COMPARISION BETWEEN BSESENSEX AND BSE CD

02000

4000

6000

8000

10000

12000

14000

16000

2000

2001

2002

2003

2004

2005

2006

2007

YEAR

SENSEX

sensex

bse cd

Ana!$sis:

The 9s=6 billion plus Indian consumer durable industry is going through a

recession phase with -E4 companies going in for strategies to increase market share.

The last few years have seen stiff competition in the consumer durable industry,

fuelled mainly on account of the entry of major -E4 players. uring 7O@; they

increased their presence as well as market share across segments. In the 4TP segment

foreign players now control *6D market share, while omestic players have a ;6D

market share. This entrance of foreign competition led to the downtrend in the

performance of consumer durable sector. In the year 2@@@ the sense# is 0@@@ and the

bse cd is below 2@@@. In the year ending of 2@@; the sense# is 1*,6@@ and bse cd is

*6@@.

;1


62/89

'o0parison o% *SE Sense ,s/ *SE FM'


SENSEX AND BSE FMCG

0

2000

4000

6000

800010000

1200014000

16000

2000

2001

2002

2003

2004

2005

2006

2007

YEAR

SENSEX

sensex

bse fmcg

Ana!$sis:

The 7-4F sector has been in recession for uite a while. They have been

looking for e#cise duty cuts to boost sales. The threat of imports from countries like

Mapan has been another worrying factor for the industry and they have been asking for

adeuate safeguards from the government. The 7-4F segment is also in the

doldrums with the onset of oversupply in the market. The industry's main grouse in

the past year has been that the manufactures are not able to achieve sufficient

revenues to achieve substantial growth. 7or the past two years the 7-4F industry has

not been seeing much growth rate. In the year 2@@@ the sense# is 0@@@ and the bse

7-4F is below 2@@@. In the end of year 2@@; sense# is 10@@@ and the bse 7-4F is

below 2@@@.

;2


63/89

'o0parison o% *SE Sense ,s/ *SE H'

COMPARISION BETWEEN BSE SENSEX

AND BSE HC

0

5000

10000

15000

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

YEAR

SENSEX

sensex

bse hc

Ana!$sis:

!tocks of pharmaceutical companies have under performed the $ombay !tock

"#change sense# by clocking 16 percent depreciation in value compared with the 12.?

per cent fall in the inde#. All pharmaceutical stocks, e#cept 9anba#yaboratories,

posted a decline in their prices on an absolute basis. Among domestic 5harmaceutical

companies, the market price of ockhart declined over *6 percent, 4ipla down 2?

percent and r 9eddyWs aboratories declined by over 1< percent. These are the main

cause for the downtrend of the G4 !ector in India for the year 2@@6+2@@;. In the year

2@@@ the sense# is 06@@ and the bse G4 is below 2@@@. In the end of year 2@@; sense#

is above 1@@@@ and the bse G4 is below 6@@@.

;*


64/89

'o0parison o% *SE Sense ,s/ *SE '

COMPARISION BETWEEN BSE SENSEX

AND BSE CG

0

5000

10000

15000

2000

2001

2002

2003

2004

2005

2006

2007

YEAR

SENSEX

sensex

bse cg

Ana!$sis:

This year, the 4apital Foods industry has slated for a growth of 26

percent over and above the 21 percent growth achieved. The industry segment is

seeing further investment, joint venture, and new development product. Eew

capacities might bridge the e#isting demand+supply imbalance in the domestic arena.

In the beginning of the fiscal year the sector witnessed a down trend but now the

sector is witnessing renewed interest, with the government initiating steps to improve

infrastructure and increase the penetration rate. In the year 2@@@ the sense# is 06@@

and the bse 4F is below 1@@@. In the end of year 2@@; sense# is 10@@@ and the bse

4F is below 2@@@.

;0


65/89

'o0parison o% *SE Sense ,s/ *SE TE'H


SENSEX AND BSE TECK

0

5000

10000

15000

2000

2001

2002

2003

2004

2005

2006

2007

YEAR

SENSEX

sensex

bse teck

Ana!$sis:

The Technology sector is now witnessing renewed interest, with the

government initiating steps to improve infrastructure and increase the penetration rate.

The industry is considered as having the highest potential for investment in India. It

attracted large amounts of foreign investments over the financial year 2@@6+2@@;. $ut,

after e#periencing a boom in the beginning months of the financial year, the sector

has seen some down trend and is e#pected to pick up in the months to come. In the

year 2@@@ the sense# is 0@@@ and the bse T"4> is 2@@@. In the end of year 2@@;

sense# is below 10@@@ and the bse T"4> is below 0@@@.

;6


66/89

'o0parison o% *SE Sense ,s/ *SE PSU

comar!s!on "e#$een BSE SENSEX%s&BSE PS'

0

2000400060008000

10000120001400016000

date

2000

2001

2002

2003

2004

2005

2006

year

senssex

sensex

bse psu

Ana!$sisH

Though the perception is that the central public sector undertakings %5!:s& are a

drag on the government, their latest dividend figures for 2@@6+2@@; reveals that the

sector has paid back more than it has got from the government in the form of euity

support. The Eet worth grew at a feverish pace of *;.;@D the highest in last three

decades+indicating future prospects of increase in growth. The net profit of these

companies 3oomed 6


67/89

'o0parison o% *SE Sense ,s/ I'I'I PRU BroCth P!an

Ana!$sis:

The Frowth 5lan of I4I4I 5rudential basically concentrates on the

Automobile, $anks, "lectrical "uipment, 5harmaceuticals and IT sectors as its main

portfolios. It also invests in other sectors in order to reduce the risk. ue to the down

trend of the performance of Automobile and 5arma sector in the initial months of the

financial year 2@@2+2@@*, the fund has seen some down trend in the initial stages, but

moved in random with the benchmark sense#. $ut with the pick up of $anking and

5!:Ws over the past few months, the fund has seen a rapid growth in its performance.

The growth plan reduces risk in investment by diversifying the funds pooled, over

various sectors.

;=


68/89

'o0parison o% *SE Sense ,s/ I'I'I PRU PoCer P!an

Ana!$sis:

The 5ower 5lan of I4I4I 5rudential concentrates more on the electricaleuipment, Automobile, $anks and -achinery sectors. ue to the out performance of

the 5!:W! in "lectrical "uipment segment and $anking sector the fund has a

consistent growth from the beginning of the financial year 2@@2+2@@*. The

diversification of the fund has reduced the risk of loss of returns from poor

performing sectors with the e#tra earnings from the outperforming sectors. This

shows the advantages of diversification of portfolios in a clear+cut manner.

;


69/89

INTERPRETATION

The markets in which they operate, their costs and the demand for their

products drive returns of various companies. These factors are not always uniform for

all companies. The risk reduces if we e#tend the choice of stocks from 6 to 1@. $ut

there is no significant change in risk. if we increase the number of stocks from 6@ to

1@@. !imply put, diversification means not putting your eggs in one+basket rather,

spreading the risk across securities and building the portfolio with varying blocks.

Also, seeing the graphs we can say that the performance of most of theindividual sectors when compared with the sense# has shown volatility in their

performance. Bnly two of the sectors could show an upward trends in the euity

market while others were in the downward trend. $ut the diversified euity funds had

shown upward trend in their performance. Also both annuali3ed and absolute returns

given by euity+diversified funds are more than that of the inde# returns. This shows

that by investing in euity diversified mutual funds we can reduce the risk of the

euity market by balancing the risk among various sectors and make better profits

than individual sectors. Therefore, it is always better to invest in diversified euity

funds than investing in euity linked funds concentrated only in one sector.

;?


70/89

PERFORMAN'E E,ALUATION

MEASURIN MUTUAL FUND RETURNS

The various methods for measuring mutual fund returns are as followsH

1. 5ercentage 4hange

2. !imple Total 9eturn.

*. 9BI or total 9eturn with ividend 9e+investment.

'OMPUTATION OF PER'ENTAE 'HANE IN NA,

5ercentage change EAP is an absolute measure of return, which finds the EAP

appreciation between two points of time, as a percentage. 7or e#ample, if the EAP of

a fund was 9!. 2*.06 at the beginning of a year and 9!. 2=.;6 at the end of the year,

the percentage change in EAP K %2=.;6 C2*,06&2*.06. 1@@K1=+?1D

SIMPLE ANNUALI>ED TOTAL RETURN

It is customary to represent return as percentage per annum. This makes it easier to

compare the returns from various investment options, for a standard holding period.

The investor in a mutual fund can choose to keep his investment for any period of

time, not necessarily one year. Therefore, if the holding period is different from one

year, the computation shown above has to be normali3ed as Dp.a. This return is called

the simple annuali3ed return form for investing in the mutual fund.

=@


71/89

'OMPUTATION OF TOTAL RETURN 2ITH RE-IN,ESTMENT METHOD

This method is also called the return on investment %9BI& method. In this method, it is

assumed that dividends are re+invested into the scheme as soon as they are received at

the prevailing EAP %e#+dividend EAP&.

Total return with reinvestment is calculated asH

%%Palue of holdings at the end of the period value of holdings at the beginning of the

period&+1& 1@@

Palue of holdings at the beginning of the period K number of units at the beginning

EAP

Palue of holdings at the end of the period K %number of units held at the beginning Y

number of units reinvested& and EAP

Eumber of units re+invested K dividendse#dividend EAP

=1


72/89

PERFORMAN'E OF EUITY DI,ERSIFIED FUNDS OF SELE'TEDFUNDS OF I'I'I PRU


73/89

PERFORMAN'E E,ALUATION OF I'I'I PRUDENTIAL PO2ER PLAN

USIN SHARPE RATIO

S/NO/ DATE SENSEJ NA,

RETURN

J


74/89

01 61@2@@0 6=6


75/89

PERFORMAN'E OF EUITY DI,ERSIFIED FUNDS OF SELE'TED

FUNDS OF I'I'I PRU


76/89

PERFORMAN'E E,ALUATION OF I'I'I PRUDENTIAL RO2TH PLAN

USIN SHARPE RATIO 7

S/NO DATE SENSEJ NA,RETURN


77/89

2or.inB Notes:

here,

K value of Frowth 5lan

OK value of !enses

WK Average return of growth plan

OWK Average return of !ense#

K!tandard deviation

E K Eo. Bf time periods taken

roCth P!an:

' K n K ?.*2

O' K On K ;.1=6

K %+'&Z n K2@06

K %O+O'&Z n K1;.16?

roCth P!an: Sense

!p K %#'+


78/89

Gence, by observing the !harpe 9atios of the 59: I4I4 growth 5lan and !ense#, it is

clear that the fund is outperforming the benchmark !ense#.

PERFORMAN'E OF DYNAMI' PLAN OF I'I'I PRU


79/89

PERFORMAN'E E,ALUATION OF PURDENTIAL I'I'I DYNAMI' PLAN

USIN SHARPE RATIO

!.EB AT" !"E!" EAP 9"T:9E %D& %+[&2 9"T:9E %D&O %O+O&21 12112@@2 1@

2 1222@@* *22?.=* 11.1? 11.?


80/89

DYNAMI' PLAN

ynamic 5lanH !ense#H

' K n K


81/89

INTERPRETATION:

The graphs show that the funds performed well in the long run since their

inception. In the 1???+2@@@ era when the euity market was in a boom the funds

outperformed, and also in the later periods they have shown a good performance than

the !ense#. Bver the past two years the power and Frowth 5lans of I4I4I 59: have

shown consistent performance than the $!" !ense#. They also proved that euity

funds are a good choice for investment in the long run. ynamic 5lan of I4I4I 59:

is a plan intended to make aggressive asset, sectoral and stock specific calls to e#ploit

trends in the market. It goes with the idea of diversification of stocks in its investment

patterns. !o its performance has shown varied results, but ultimately it had gained a

hand over the !ense# over the past few months. Thus, we can interpret that euities

are a better investment in the long run.

$ut, the graphs above are based on statistical data only i.e., only on the EAP Ws of

the funds and inde# of the !ense#. This is only a vague information, which cannot be

taken for granted just like that. e need some analytical measures, which would tell

us absolutely whether the funds had performed well or not. !o, rather than relying on

the statistical data it is always better to make evaluations based on the available data.

5erformance measures of mutual funds are the best methods of evaluating the

performance of mutual funds.


82/89

'HAPTER-,I

SUMMARY

FINDINS SUETIONS


83/89

7indings

1. -ost of the investment habits of the customers are still very conservative and

they prefer life insurance polices personal fund %06D& and national savings

certificate occupy 2*D of the total customer.

2. It was concluded by the research analysis that promptness inservices was

considered to be one of the important factors while making customers investment.

*. A large number of customers favour [personali3ed service[ as their important

0. -ost of the customers are not aware of the least technology this was a fact

surveyed from the customers.

6. Gowever, a group of customers comprising of 2@D reali3ed the importance if latest

technological services being offered by the banks and it was found out that customers

and interested if free internet banking , anywhere banking , personali3ed services ,

free cheue pick+ups , so on and so forth were provided free of cost.

;. A large section of the society to day wants to earn a return of at least 1@D and at

most 2@D on its investments.

=. I4I4I bank caters to the investment avenues of customers on the basis of safety,

liuidity, and return on savings.


84/89


85/89

SUMMARY

All investment i.e in shares, debentures or deposits involve risk, The value of shares

may down depending on the performance of the company, the industry, state of

capital market and the economy. In euity investments longer the term lesser will be

the risk. 4ompanies may default in payment of interest on their debentures, $onds

etc,

9isk can be eliminated, but skillful management can minimi3e risk. -utual fundscan reduce risk through diversification and professional management. iversified

portfolio minimum risks and ma#imi3es returns. Thus, diversification reduces the risk

of loss due to under performance of a specific asset.

The performance of individual sectors in India has shown volatility over the time

periods. !ome sectors were performing well, while the others were showing

downward trend with respect to the benchmark !ense#, while most of the sectors wereshowing fluctuations in their performance. Eo one can know, when the sector can

outperform and when the sector can outperform and when the sector can under

perform the benchmark. !o, risk is always involved in euity investment. In order to

reduce this risk,. -utual fund companies came up with the concept of diversification

of portfolio in mutual fund schemes. The performance of diversified euity funds of

5rudential I4I4I had shown phenomenal performance. Also, the absolute returns

given by them were higher than the returns produced by the stock inde#, which is

taken as a benchmark.

"uity diversified funds of 5rudential I4I4I have out performed the benchmark

!ense#. This has proven that, diversifying risk across securities and building the

portfolio with assets of varying risk class will reduce the risk and also reduces the

volatility involved in euity market.


86/89

Thus, the best advice for today's investor is to go for diversified euity linked saving

schemes wherein the dividends are high along with benefits of ta# savings.

"ventually, it can be said that euity investment with diversified portfolio over the

long term is a superior option to reduce risk for a given return.


87/89

SUESTIONS

7rom the beginning safety is the prime concern for investors. The fact

should be revealed some schemes of mutual funds also having safety.

"ducating investors about the advantages of euity linked savings

schemes%"!!& is a key factor.

"ducate investors about risk management in mutual funds.

"mpower the investor to enable herhim to take informed decision.

Gere information plays a major role. The right information, at the right

time. In the right uantity and in the form shehe is able to understand.

There no point giving an ocean of information few can make sense of.

Bf savings bank account is the present investment option for more

people because of safety and liuidity. ebt funds in mutual funds are

also having that advantage, This is to be highlighted.

$e from the analysis of the company its clear that only 2 percent

people are interested at risk. !o high risk the company should highlight

high return formula.


88/89

*I*LIORAPHY


89/89

*I*LIORAPHY

Butlook -oney.

5admalochan Ga3arika, ($usiness !tatistics) !ultan 4hand sons, Eew

elhi, 7irst "dition.

!ecurity analysis and port folio management punitavati pandain.

!ecurity 5rtfolio management. P > $halla, !,chand publications

-IT9A M>., 5rinciples of commerce, Tata -cFraw hill publishers.

I4I4I $roachers. And I4I4I fact sheet.

2E*SITES:-

www.icicipru.com

www.amfi.com

www.moneycontrol.com

www.fundspectrum.com

www.sebi.com
http://www.sebi.com/http://www.sebi.com/

Risk Analysis-And Risk Return Report

Documents