A Project Report On:

Need of financial advisors for mutual fund investors

(With special reference to KARVY)
INTERIM REPORT SUBMITTED BY:

Corporate Guide:
Mr. Vipin kumar Product Head (MF), KARVY, GHAZIABAD

Academic guide:
Dr. Sharat Sharma SRM University, NCR-Campus

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

BHUBANESWAR BHUBANESWAR

CONTENTS:

serial no 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Topic certificate by organization certificate by faculty guide Acknowledgement executive summary company overview karvy at eastern zone mutual funds basics concept of benchmarking financial planning for investors why has it becomethe largest financial intermediary? how investors choose between funds? most popular stocks among fund managers most lucrative sectors among fund managers Systematic Investment Plan (in details) does fund ranking and performance persist? portfolio analysis tools research report

Page no. 4 5 6 7 817 1720 21--31 31 32 32-34 34-36 37 38-39 39-41 42-43 44-49 50

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

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.

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.

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.

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 dont 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

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.

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 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
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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 didnt stopped there, it stepped into corporate finance and investment banking in the year 1995. Karvys 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 Net worth 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.

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

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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.

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
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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. 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:

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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 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 14

internet through its website: www.karvy.com . Other than it, it also provides its various services through SMSes. Karvys 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 theres a offering for everybodyeveryones 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.

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: 15

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 todays karvy group, the largest financial intermediary of India. But success didnt came to karvy at a flow, the hard work and dedication of its workforce made it what it is todaygradually 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. 8.full- fledged IT driven operation.

9.Indias no.1 registrar & securities transfer agent. Clientele of karvy: Karvys 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 :

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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:

Regional head
Zonal heads(for different states)
branch heads

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 karvys branch offices at Kolkata, then there exist ten branches of karvy at Kolkata, which are as follow: 1. Lake Town. 2. Burra bazaar. 3. Shyam bazaar. 4. Dalhousie. 5. New Alipore. 6. Behala. 7. Jatin Das Road. 8. Phoolbagan. 18

9. Salt Lake. 10. Howrah. Structure according to the Products offered by Karvy:

REGIONAL HEADS

PRODUCT HEADS HEA Realty Debt divisio n

Mutual funds

KA

Insuran ce brokin g

commo dities

Stock brokin g

Deposi tory particip ant

Mercha nt & inv.ban king

PMS

KARVY Mutual Fund Services:

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 childs 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 doesnt 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
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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 payin. 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 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 thats 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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its 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 funds 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: 24

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 riskreturn 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.

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Risk v/s. return:

Working of a Mutual fund:

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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 Risk Disclosures 28

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 doesnt 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 sub brokers.eg: KARVY being the top financial intermediary of India has the greatest network.
29

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 its 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: 1.variation in the funds performance due to change in its management/ objective.
30

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. 3. liquid funds: Short Term Government Instruments Interest Rates as Benchmarks, JPM T31

Bill Index

To measure the funds 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 form investment options on the basis of the mentioned parameters, we get this in a tabular

32

Return

Safety

Volatility

Liquidity

Convenience

Equity Bonds Co. Debentures Co. FDs Bank Deposits PPF Life Insurance Gold Real Estate Mutual Funds

High Moderate Moderate

Low High Moderate

High Moderate Moderate

High Moderate Low

Moderate High Low

Moderate Low

Low High

Low Low

Low High

Moderate High

Moderate Low

High High

Low Low

Moderate Low

High Moderate

Moderate High High

High Moderate High

Moderate High Moderate

Moderate Low High

Gold Low High

We can very well see that mutual funds outperform every other investment option. On three parameters it scores high whereas its 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 doesnt 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 its 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 doesnt 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: I)Mutual funds combine the advantage of each of the investment products: mutual fund is
33

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, its 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 investors. 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:

1.
34

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 the investor a small exposure to a new asset class without risk to the principal amount. Such
35

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 havent 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.

36

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

Company Name Reliance industries limited Larsen & toubro limited ICICI bank limited State bank of India Bharti airtel limited Bharat heavy electricals limited Reliance communication ventures ltd Infosys technologies ltd Oil& Natural gas corporation ltd. ITC ltd.

no. of funds 244 206 202 188 184 200 169 159 153 143

no. of funds
300 250 200 150 100 50 0

no. of funds

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.

37

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 dont 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
automotive banking & financial services cement & construction consumer durables conglomerates chemicals consumer non durables engineering & capital goods food & beverages information technology media & entertainment Manufacturing metals& mining Miscellaneous oil & gas Pharmaceuticals Services Telecom Tobacco Utility

No. of MFs betting on it

255 196 237 51 218 259 146 317 175 284 218 259 275 250 290 250 200 264 150 225

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 &
38

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:

consumer non

banking & financial

engineering &

information

cement &

chemicals

media &

350 300 250 200 150 100 50 0

Axis Title

conglomerates

automotive

services

metals& mining

food & beverages

oil & gas

pharmaceuticals

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
39

consumer durables

manufacturing

miscellaneous

telecom

tobacco

utility

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

Scheme Reliance diversified power sector retail Reliance regular savings equity principal global opportunities fund DWS investment opportunities fund BOB growth fund

Amount 1000 1000 1000 1000 1000

NAV 62.74 22.208 18.86 35.31 42.14

NAV Date 30/5/2008 30/5/2008 30/5/2008 30/5/2008 30/5/2008

Total Amount 14524.07 13584.944 14247.728 13791.157 13769.152

In the above chart, we can see how if we start investing Rs.1000 per month then what return well 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 Birla SL tax relief '96 Birla SL equity fund Birla frontline equity fund

NO. OF INSTALMENTS

Original inv 144000 114000 66000

Returns at BSE 200

FUND RETURNS

144 114 66

553190 388701 156269

1684008 669219 181127

40

Chart Title
1800000 1600000 1400000 1200000 1000000 800000 600000 400000 200000 0 Birla SL tax relief '96 144000 553190 669219 388701 114000 181127 156269 66000 Original inv Returns at BSE 200 FUND RETURNS 1684008

BIrla SL equity Birla frontline fund equity fund

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.

41

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 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
42

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 rerating 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 dont 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 dont 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 dont show the level of ethics followed by the fund. A fund or fund manager that is involved in a scam or financial irregularities wont 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 dont 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 dont match the investors 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 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
43

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 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
44

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 funds 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 funds portfolio doesnt 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 funs market volatility and market risk. The value of Rsquared 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 rsquared is low as it indicates that the fund performance is affected by factors other than the markets. For example:
Case 1 R2 B 0.65 1.2 Case 2 0.88 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 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 45

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 Magnu m equity fund Magnu m multipli er plus Benchm ark BSE100 -23.73%

1M 9.02%

3M -7.71%

6M -15.18%

1Y 26.61%

3Y 45.07%

5Y 48.96%

-26.16%

5.57%

-11.26%

-18.00%

21.44%

45.28%

59.31%

-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 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 46

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:
70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% -10.00% -20.00% -30.00% -40.00% magnum equity magnum multiplier bse 100

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Quantitative data: Ratios Standard deviation Beta r-squared Sharpe ratio Portfolio turnover Total expense ratio 1.46% 31% 2.5% Magnum equity fund 26.00% 0.96% Magnum multiplier plus 26.90% 0.95% 0.84% 1.42% 25% 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 funds 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%

In the form of a chart:

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Chart Title
35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% sd equity fund 26.00% beta 0.96% 0.95% Axis Title

rsquare d 0.93% 0.84%

sharpe 1.46% 1.42%

portfoli o 31% 25%

expens es 2.50% 2.50%

multiplier plus 26.90%

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Research report

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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 Indias 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 51

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: 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.

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

YES NO

135 65

No. of persons= 200

NO 33% YES 67%

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

25 10 18

12

Chart Title
no trust

benefitnot enough

Series3 Series2

enjoys investing in their own

Series1

lack of knowledge 0 5 10 15 20 25 30

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

Totally ignorant Partial knowledge of MFs Aware of only scheme in which invested Good knowledge of MFs

28 37 46 24

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Chart Title
good knowledge 18% totally ignorant 21% partial knowledge 27%

aware of only invested scheme 34%

.where from you purchases mutual funds?

Directly from the AMCs Brokers only ( large intermediaries) Broker/ sub-brokers Other sources 33 28 59 15

70 60 50 40 30 20 10 0 AMCs Brokers Brokers/ sub brokers others Series1

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 Which feature of the mutual funds allure you most?

Diversification Professional management Reduction in risk and transaction cost Helps in achieving long term goal 42 29 34 30

Chart Title
Series1

Helps in achieving long term goal Reduction in risk and transaction cost Professional management Diversification

30 34 29 42

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
56

55 32 21 27

Chart Title
Young unmarried stage Young Married with children stage Married with older children stage Pre retirement stage 24%

20% 41% 15%

Are you availing the services of personal financial advisors?

Yes No

87 48

no of persons

no 36%

yes 64%

Which expertise of the personal financial advisor is demanded most? 57

Portfolio review & investment recommendation Planning to achieve specific financial goals Managing assets in retirement Access to specialists in areas such as tax planning

43

35 30 27

Chart Title
Series1 Access to specialists in areas such as tax planning Managing assets in retirement Planning to achieve specific financial goals Portfolio review & investment recommendation

27 30 35 43

What is the major reason for using financial advisors?

Want help with asset allocation Dont have enough time to make own decision To explain various investment options Want to have surety about financial goals

42 23

37 33

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Chart Title
Series1 42 37 23 33

Want help with asset allocation

Dont have enough To explain various Want to have surety time to make own investment options about financial goals decision

What is the major reason for not using financial advisor?

Have access to all resources needed Believe advisors are too expensive Unsure how to find a trustworthy advisor Want to be in control of own investments

18 53 21 43

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Chart Title
Want to be in control of own investments Unsure how to find a trustworthy advisor Believe advisors are too expensive Have access to all resources needed 0 10 20 30 40 50 60 Series1

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. 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. 60

 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 didnt. 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 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 61

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 [ ] [ ]

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

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 .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 [ ] [ ]

Access to specialist in areas such as tax planning [ ] .what is the major reason for using financial advisors? Want help with asset allocation Dont have time to make my own investment decision
63

[ ] [ ]

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.com www.bseindia.com www.nseindia.com www.investopedia.com

journals & other references:

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Karvy the finapolis Karvy- business associates manual The Economic Times Business Standard The Telegraph Business India Fact sheet and statements of various fund houses.

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