SYNOPSIS ON RISK MANAGEMENT IN INDIAN BANKING SECTOR
Submitted by Shweta Roll No 1175041
Submitted to Ms. Ritika Gupta
in the partial fulfillment for the award of the degree of
Masters of Business Administration
Rayat and Bahra Institute of Management,Mohali Punjab Technical University, Kapurthala
introduction of innovative products. quantity as well as stability such that they have started to expand and diversify at a rapid rate. an essential component of risk management framework would be to mitigate all the risks and rewards of the products and service offered by the bank. Hence. management of Financial risk incorporating a set systematic and professional methods especially those defined by the Basel II norms because a essential requirement of banks. the safer is their Capital base
. Higher the risk. it is most essential to maintain a parity between risk and return. Indian Banks have been making great advancements in terms of progress in terms of technology. Thus the need for an efficient risk management framework is paramount in order to factor in internal and external risks. In times of volatility and fluctuations in the market. but has already shown to increase efficiency in governing of these banks as such procedures tend to increase the corporate governance of a financial institution. financial institutions need to prove their mettle by withstanding the market variations and achieve sustainability in terms of growth and well as have a stable share value. and financial instruments as well as innovation in delivery channels have highlighted the need for Indian Banks to be prepared in terms of risk management.INTRODUCTION
Risk management in Indian banks is a relatively newer practice. The financial sector in various economies like that of India are undergoing a monumental change factoring into account world events such as the ongoing Banking Crisis across the globe. higher is the return. such expansion brings these banks into the context of risk especially at the onset of increasing Globalization and Liberalization. The more risk averse a bank is. Hence. However. hence. The various aspects of increasing global competition to Indian Banks by Foreign banks. In banks and other financial institution risk plays a major part in the earnings of a bank. quality. The 2007–present recession in the United States has highlighted the need for banks to incorporate the concept of Risk Management into their regular procedures. increasing Deregulation.
Segmentation of investors on the basis of their characteristics was highlighted by Raja Rajan (1997). Subramanyam (1999). Investor protection. They touched upon varied aspects like regulation of Mutual Funds. SEBI – NCAER Survey (2000) was carried out to estimate the number of households and the population of individual investors. Investor expectations. They identified that mutual funds had a significant impact on the price movement in the stock market. and investment preference for equity as well as other savings instruments. Sandeep Bamzai (2001). Sadhak (1991). Ajay Srinivsasn (1999). periodicals. professional and research journals. performance of mutual funds and its impact on the stock markets. Sharma C. Samir K. portfolio size. Since 1986. portfolio turnover rate.REVIEW OF LITERATURE
A large number of studies on the growth and financial performance of mutual funds have been carried out during the past. Another NCAER study in 1996 analyzed the structure of the capital market and presented the views and attitudes of individual shareholders.. market timing and stock selection abilities of fund managers. in the developed and developing countries. Agarwal (1992). Brown. Krishnan (1999).
. one of the earliest attempts was made by National Council of Applied Economics Research (NCAER) in 1964 when a survey of households was undertaken to understand the attitude towards and motivation for savings of individuals. their economic and demographic profile. Barua et al. and growth of Mutual Funds and some on the performance and functioning of Mutual Funds. 20 explaining the basic concept of Mutual Funds and highlighted their importance in the Indian capital market environment. A few among them are Vidyashankar (1990). and the relationship between stages in life cycle of the investors and their investment pattern was studied Raja Rajan (1998). Brief reviews of the following research works reveal the wealth of contributions towards the performance evaluation of mutual fund. Atmaramani (1995). (1991). a number of articles and brief essays have been published in financial dailies. Investor’s characteristics on the basis of their investment size Raja Rajan (1997). Irwin. Atmaramani (1996). Sarkar (1991). In India. Lall (1991). FE (1965) analyzed issues relating to investment policy. They concluded that.
Treynor (1965) used ‘characteristic line’ for relating expected rate of return of a fund to the rate of return of a suitable market average. ‘portfolio-possibility line’ was used to relate expected return to the portfolio owner’s risk preference. William F (1966) developed a composite measure of return and risk. funds did not perform better than the composite markets and there was no persistent relationship between portfolio turnover and fund performance. The results depicted that good performance was associated with low expense ratio and not with the size. as correlation coefficient was 0. He coined a fund performance measure taking investment risk into account. Klemosky (1977) examined performance consistency of 158 fund managers for the period 196875. The ranking of performance showed better consistency between four-year periods and relatively lower consistency between adjacent two-year periods. 48 funds showed above average results and 67 funds below average results. Reward to variability ratio for each scheme was significantly less than DJIA (Dow Jones Industrial Average) and ranged from 0.78. Jensen (1968) developed a composite portfolio evaluation technique concerning risk-adjusted returns. Further. He evaluated 34 open-end mutual funds for the period 1944-63. Ippolito’s (1989) results and conclusions were relevant and consistent with the theory of efficiency of informed investors.43 to 0. to deal with a portfolio. Expense ratio was inversely related with the fund performance.0505.
. He estimated that risk-adjusted return for the mutual fund industry was greater than zero and attributed positive alpha before load charges and identified that fund performance was not related to expenses and turnover as predicted by efficiency arguments. He evaluated the ability of 115 fund managers in selecting securities during the period 1945-66. 39 funds had above average returns. Jensen concluded that. while 76 funds yielded abnormally poor returns. Sample schemes showed consistency in risk measure. Sharpe. there was very little evidence that funds were able to 22 perform significantly better than expected as fund managers were not able to forecast securities price movements.on an average. Using gross returns. Analysis of net returns indicated that.
0087 against mean weekly returns from income growth schemes of . but in groups. Aspects of Mutual fund such as fund diversification. Out of 80 schemes.
.Ronay and Kim (2006) have pointed out that there is no difference in risk attitude between individuals of different gender. consistency between risk measures. But it holds tremendous promise both in the global and Indian market as its basic philosophy i. Gupta and Sehgal (1997) evaluated investment performance for the period 1992 to 1996. consistency of performance. Gender difference was found at an individual level. males indicate a stronger inclination to risk tolerance. but between the groups.0023 respectively
Mutual fund industry is a twenty century phenomenon in the global context. males expressed a stronger pro-risk position than females. For the study 80 mutual fund schemes of private and public sector were taken. 54 were close ended and the 26 were open-ended. Results showed that income growth schemes were the best performers with mean weekly returns of . quick and exponential returns coupled with reasonable amount of security from risk is in tune with the philosophy of the new age and its investors. fund objectives and risk return relation in general were studied.e. of which it is already showing signs. And strictly speaking the real efflorescence of the Indian mutual fund industry started in the far end of the last century and is more effectively a phenomenon of the new millennium. So it can be said that given the right push and the environment along with all the facilities the mutual fund industry can become the investment industry of the future.0021 and .
These savings could be channelized in the mutual funds sector as it offers a wide investment option. India has a saving rate of more than 35% of GDP. Despite this huge progression in the industry.NEED OF THE STUDY
Mutual funds are considered as one of the best available investment options as compare to others alternatives.35% in the next 3 to 5 years and reach US 300 billion by 2015. Investors who were not exposed to equity stocks suddenly infused funds.
. Equity markets were in the limelight. With subsequent easing of regulations. focusing on the rapidly growing tier II and tier III cities within India will provide a huge scope for this sector. Over the last couple of years mutual funds have given impressive returns. especially equity funds. there still lies huge potential and room for growth. In addition. All fund houses boasted of giving phenomenal returns. it is estimated that the mutual fund industry will grow at a rate of 30% . The biggest advantage of mutual funds is they provide diversification. The growth period first started during early 2005 with markets appreciating significantly. Further tapping rural markets in India will benefit mutual fund companies from the growth in agriculture and allied sectors. by reducing risk & maximizing returns. The development of this sector so far has been commendable and with the above positive factors we are looking at a more evolved industry. with 80% of the population who save. AUM grew considerably and fund houses were on a spree of launching new schemes. Many funds outperformed markets. As it can be noted. They are very cost efficient and also easy to invest in. Most stocks were trading in green. there is huge growth and potential in the mutual fund industry. India is ranked one of the fastest growing economies in the world. With 2006 approaching more towards 2007. The financial year 2007-08 was a year of reckoning for the mutual fund industry in many ways. markets rallied like never before.
The study aims at learning the techniques involved to manage the various types of risks. Tools applied in for measurement and management of various types of risks. Having an insight into the practical aspects of the working of various departments in banks. The application of the techniques involves us to gain an insight into the following aspects: An overview of the risks in general. market and operational risks attached to the banking sector. An insight of the various credit.
. still the project covers whole subject in concise manner. Though the risk management area is very wide and elaborated. market and operational risks associated with banking sector . various methodologies undertaken.OBJECTIVES OF THE STUDY
To study broad outline of management of credit.
* Selecting a fund that has a detailed asset allocation strategy by fund type category to reflect the investment objectives of the fund.HYPOTHESIS
There is a general notion that an investment in mutual fund is always risky. But the thing which must be remembered by the investors is: "INVESTMENT IN MUTUAL FUND IS SUBJECT TO MARKET RISK"
Although there is no one mutual fund that will be suitable to all kinds of investors. mutual fund investors need to identify a suitable fund for them. Choice Risks. bonds etc and that all the capital market instruments have risk. It will be the first step towards making successful investments in mutual funds to make Mutual Funds their "CUP OF TEA". Prediction Risks. Identifying a suitable fund can be done in a two-step manner as follows: * Selecting a fund with investment objectives and preferences. Risks can be Investor Psychology Risks.
Mutual funds can be win-win option available to the investors who are not willing to take any exposure directly to the security markets as well as it helps the investors to build their wealth over a period of time. debentures. return objectives. and Cost Risks etc. time horizon and risk tolerances that meet the requirements of the investor. Investors should always be conscious of the fact that Mutual Funds invest their funds in capital market instruments such as shares. Hence.
But for the creation of wealth through this avenue a proper understanding of the Mutual Funds is must. internet.
DATA COLLECTION Primary Research: The primary study is done on the basis of questionnaire that had got filled up directly from the investors of different age. magazines etc. Newspapers such as Business Standard. Convenience Sampling: In convenience sampling.
The dissertation will involve collection of data about the Mutual Funds and its future scenario with the help of Primary and Secondary Data Collection Techniques. the selection of units from the population is based on easy availability and/or accessibility. Websites such as moneycontrol.The Indian Equity Market has grown significantly during the last three years. SOURCES OF DATA Primary sources :(a) Questionnaire technique
In Secondary data the information will mainly be accessed through the following sources: Information regarding the growth of Mutual Fund industry and performance of various Mutual Fund schemes will be collected from the factsheets of the various mutual fund houses. It will be consisting of data collected from various journals.com etc.
.com.Sector-17 of Chandigarh. Economic Times etc. books. Secondary Research: The study is done on secondary basis. Mutual Funds are not left far behind. Both the avenues have created wealth for the investors. SAMPLE AREA. mutualfundsindia. income and profession.
50 onwards 5. Gold ____
6. Among various investment alternatives you think is best for you and why? _____________________________________________________________________ 7.5lakhs c. Stock market ____ f. Up to 1. Objective of your investment is? Rate on scale of 1-5 (1-lowest. Mutual funds ____ b. Age group: a. 1 being lowest and 10 highest.Frequency counts (numbers and percentages)
1. Insurance ____ j. b. 25-35 c. Address: 3. RESEARCH DESIGN. At present you invest in: (number 1-10).SAMPLE SIZE. Contact No. Name: 2. Real estates ____ h. > 5 lakhs 6. 5-highest) a. 35-50
g.: 4. Rate of return _____ b.Exploratory Research DATA ANALYSIS TOOLS. a. d. Others ____
e. Income range (Annually) a. c. Bank FD ____ PF ____ Bonds____ Post Office ____ e. 5-3 lakhs b. Security _____
.50-75 customers of Banks.
Debt b. 2-3 years d. Financial Advisors _____ 9. Speculation _____ e.V & Newspapers Magazines Friends & Relatives Financial Advisor Others _________ _________ _________ _________ _________ b. b. d. Do you have any future plan for investing in mutual funds? a. Friends _____ d. (1-lowest. Equity b. Above 5 year
12. 5-highest) a.c. What is the most preferred period of investment in the mutual fund? Rate 1-5. IF yes. Financial experts _____ c. e. No
. 5highest) a. Who influence your investment decision the most? Rate On Scale 1-5 (1-lowest. Marketability _____
8. Tax Free Return _____
d. Awareness towards mutual fund through: Rate On 1-5. Below 1 year _________ _________ _________ _________ _________
b. Your own decision _____
11. 3-5 years e. Attractive advertisements _____ e. 5-highest) a. c. 1-2 year c. in which fund you want to invest in future? a. Yes 13. (1-lowest. T. Balanced c.
jsp?contentDisp=SubSection&sec_id=52&sub_sec_id=52 Sadhak H.in/bitstream/10603/3455/6/06_chapter%202. Performance Appraisal of Mutual Funds in India. Performance Appraisal of Mutual Funds.sebi.com/search?hl=en&lr=&rls=WZPA.html http://shodhganga. Excel Publication House 2001 Value Research. Response Publication House 2003 Turan MS and Bodla BS. Management of Financial Services.indianmba.
suggestions. Excel Publication House 2002
.com/mfi_5july. Mutual Funds in India.indiamart.google.html http://www.com/india_business_information/advantage_mutual_funds.WZPA:en&defl=en& q=define:Mutual+fund&sa=X&oi=glossary_definition&ct=title http://amfiindia. Mutual Fund Insight.in/Index.gov.WZPA:200606. RBSA Publication House 1996 Chander Ramesh.asp http://www.jsp?contentDisp=Section&sec_id=1 http://www.com/showhtml.com/Faculty_Column/FC589/fc589.pdf http://finance. 15 Jan-14 Feb issue 2007 Mathur BL.14.inflibnet.ac.
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