Project report on

“Comparative study of mutual funds”

By:-

Rajesh Kumar Buwade

MBA III Sem (finance)
CH Institute of Management & Commerce

Under the Supervision of:

What is Mutual Fund?

A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors
to pool their money together with a predetermined investment objective. The mutual fund will have a
fund manager who is responsible for investing the gathered money into specific securities (stocks or
bonds). When you invest in a mutual fund, you are buying units or portions of the mutual fund and
thus on investing becomes a shareholder or unit holder of the fund.

Mutual funds are considered as one of the best available investments as compare to others they are
very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund,
investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on
their own. But the biggest advantage to mutual funds is diversification, by minimizing risk &
maximizing returns.

Types of Mutual Funds

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk
tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a collection of
many stocks, an investors can go for picking a mutual fund might be easy. There are over hundreds
of mutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned
below.
Open ended scheme:

Being open-ended means that, at the end of every day, the fund issues new shares to investors and
buys back shares from investors wishing to leave the fund. An open-end fund is one that is available
for subscription all through the year. These do not have a fixed maturity. Investors can conveniently
buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is
liquidity.

Close ended scheme:

A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The
fund is open for subscription only during a specified period. Investors can invest in the scheme at the
time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock
exchanges where they are listed. In order to provide an exit route to the investors, some close-ended
funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV
related prices.

Interval scheme:

Interval Schemes are that scheme, which combines the features of open-ended and close-ended
schemes. The units may be traded on the stock exchange or may be open for sale or redemption
during pre-determined intervals at NAV related prices.

The risk return trade-off indicates that if investor is willing to take higher risk then correspondingly he
can expect higher returns and vise versa if he pertains to lower risk instruments, which would be
satisfied by lower returns. For example, if an investors opt for bank FD, which provide moderate
return with minimal risk. But as he moves ahead to invest in capital protected funds and the profit-
bonds that give out more return which is slightly higher as compared to the bank deposits but the risk
involved also increases in the same proportion.
Overview of existing schemes:
By Investment objective:

Income schemes:

Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital
appreciation over medium to long term. These schemes normally invest a major part of their fund in
equities and are willing to bear short-term decline in value for possible future appreciation.

Growth schemes:

Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital
appreciation over medium to long term. These schemes normally invest a major part of their fund in
equities and are willing to bear short-term decline in value for possible future appreciation.

Balanced schemes:

Balanced Schemes aim to provide both growth and income by periodically distributing a part of the
income and capital gains they earn. These schemes invest in both shares and fixed income
securities, in the proportion indicated in their offer documents (normally 50:50).

Money Market schemes:

They specialize in investing in short term money market instruments like treasury bills, and certificate
of deposits. The objective of such scheme is high liquidity with low rate of return.

By Nature:

Equity Funds:

These funds invest a maximum part of their corpus into equities holdings. The structure of the fund
may vary different for different schemes and the fund manager’s outlook on different stocks. The
Equity Funds are sub-classified depending upon their investment objective, as follows:

• Diversified Equity Funds

• Mid-Cap Funds

• Sector Specific Funds

 • Tax Savings Funds (ELSS)

Debt Funds:

The objective of these Funds is to invest in debt papers. Government authorities, private companies,
banks and financial institutions are some of the major issuers of debt papers. By investing in debt
instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are
further classified as:

• Gilt Funds:

Invest their corpus in securities issued by Government, popularly known as Government of India debt
papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These
schemes are safer as they invest in papers backed by Government.

• Income Funds:

Invest a major portion into various debt instruments such as bonds, corporate debentures and
Government securities.

• MIPs:

Invests maximum of their total corpus in debt instruments while they take minimum exposure in
equities It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-
return matrix when compared with other debt schemes.

• Short Term Plans (STPs):

These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial
Papers (CPs). Some portion of the corpus is also invested in corporate debentures.

• Liquid Funds and Balance Funds:

Liquid Funds also known as Money Market Schemes mentioned and balance Funds as the name
suggest they, are a mix of both equity and debt funds.
Other schemes:

• Tax saving schemes:

Taxes saving schemes are designed on the basis of the policy with special tax incentives to investors.

• Capital protection schemes:

These schemes aim at protecting the initial capital investment of the investor and do not guaranteed
any assured returns.

• Index schemes:

Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or
the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index.
The percentage of each stock to the total holding will be identical to the stocks index weightage. And
hence, the returns from such schemes would be more or less equivalent to those of the Index.

• Sector specific schemes

These are the Funds/ schemes which invest in specific core sectors like energy, telecommunications,
IT, construction, transportation and financial services.

Working of a Mutual Fund

Advantages of Mutual Funds

• Diversification: An investor undertakes risk if he invests all his funds in a single scrip. Mutual
funds invest in a number of companies across various industries and sectors. This
diversification reduces the risk of the investment.

• Professional Management: An investor lacks the knowledge of the capital market operations
and does not have large resources to reap the benefits of investment. Hence, he requires the
help of an expert. Mutual funds are managed by professional managers who have the
requisite skills and experiences to analyse the performance and prospectus of companies.

• Regulatory oversight: Mutual funds are subject to many government regulations that protect
investors from fraud.

• Liquidity: It's easy to get your money out of a mutual fund. Write a check, make a call, and
you've got the cash.

• Convenience: You can usually buy mutual fund shares by mail, phone, or over the Internet. It
reduces paperwork, saves time and makes investment easy.

• Low cost: Mutual fund expenses are often no more than 1.5 percent of your investment.
Expenses for Index Funds are less than that, because index funds are not actively managed.
Instead, they automatically buy stock in companies that are listed on a specific index

• Transparency: Mutual funds transparently declare their portfolio every month. Thus, an
investor knows where his/her money is being deployed and in case they are not happy with
the portfolio they can withdraw at a short notice.

• Flexibility: Mutual funds offer a family of schemes, and investors have the option of
transferring their holdings from one scheme to other.

• Tax benefits: Mutual fund investors now enjoy income tax benefits. Dividends received from
mutual funds’ debt schemes are tax exempt to the overall limit of Rs 9000 allowed under
section SOL of the Income Tax Act.
Drawbacks of Mutual Funds

Mutual funds have their drawbacks and may not be for everyone:

• No Guarantees: No investment is risk free. If the entire stock market declines in value, the
value of mutual fund shares will go down as well, no matter how balanced the portfolio.
Investors encounter fewer risks when they invest in mutual funds than when they buy and sell
stocks on their own. However, anyone who invests through a mutual fund runs the risk of
losing money.

• Fees and commissions: All funds charge administrative fees to cover their day-to-day
expenses. Some funds also charge sales commissions or "loads" to compensate brokers,
financial consultants, or financial planners. Even if you don't use a broker or other financial
adviser, you will pay a sales commission if you buy shares in a Load Fund.

• Taxes: During a typical year, most actively managed mutual funds sell anywhere from 20 to
70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will
pay taxes on the income you receive, even if you reinvest the money you made.

• Management risk: When you invest in a mutual fund, you depend on the fund's manager to
make the right decisions regarding the fund's portfolio. If the manager does not perform as
well as you had hoped, you might not make as much money on your investment as you
expected.

Types of Mutual Funds on the Basis of Risk Vs Returns

Diversified Equity
Funds
R Balanced Funds
e MIPs
t
Gilt Funds
u
r Income Funds
n
s Floaters
Money Market Funds

Risk
Overview of schemes of selected companies:
SBI Mutual Fund plans:

Equity schemes Other schemes

 Magnum COMMA Fund  Magnum Children’s Benefit Plan

 Magnum Equity Fund  Magnum Gilt Fund

 Magnum Global Fund o Magnum Gilt Fund (Long Term)

 Magnum Index Fund

o Magnum Gilt Fund (Short Term)

 Magnum Madcap Fund  Magnum Income Fund

 Magnum Multicap Fund  Magnum Income Plus Fund

 Magnum Multiplier Plus 1993

o Magnum Income Plus Fund

(Saving Plan)
 Magnum Sector Funds Umbrella o Magnum Income Plus Fund

o MSFU - Emerging Businesses (Investment Plan)

Fund  Magnum InstaCash Fund

o MSFU - IT Fund
 Magnum InstaCash Fund -Liquid
o MSFU - Pharma Fund Floater Plan

o MSFU - Contra Fund  Magnum Institutional Income Fund

o MSFU - FMCG Fund  Magnum Monthly Income Plan

 SBI Arbitrage Opportunity Fund  Magnum Monthly Income Plan Floater

 SBI Blue chip Fund  Magnum NRI Investment Fund

 SBI Infrastructure Fund  SBI Debt Fund Series

 SBI Magnum Tax gain scheme 1993  SBI Premier Liquid Fund
  SBI ONE India Fund
Balanced scheme:
 Magnum Balanced Fund
 Magnum NRI Investment Fund - Flexi
Asset Plan
LIC Mutual Fund plans:
Equity scheme
 LICMF Equity Fund - (D)
 LICMF Equity Fund - (G)
 LICMF Growth Fund (D)
 LICMF Growth Fund (G)
 LICMF Index Fund - Nifty
Plan (D)
 LICMF Index Fund - Nifty Plan (G)
 LICMF Index Fund - Sensex Advantage Plan
(D)
 LICMF Index Fund - Sensex Advantage Plan
(G)
 LICMF Index Fund - Sensex Plan (D)
 LICMF Index Fund - Sensex Plan (G)
 LICMF India Vision Fund (D)
 SBI Short Horizon Fund
o SBI Short Horizon Fund - Liquid
Plus Fund
o SBI Short Horizon Fund - Short
Term Fund
Debt scheme
LICMF Bond Fund - (D)
LICMF Bond Fund - (G)
LICMF FMP: Series 32 - 13Mth (D)
LICMF FMP: Series 32 - 13Mth (G)
LICMF G-Sec Fund - (D)
LICMF G-Sec Fund - (G)
LICMF G-Sec Fund - PF Plan (D)
LICMF G-Sec Fund - PF Plan (G)
LICMF Interval Fund - Annual - Sr.1 (D)
LICMF Interval Fund - Annual - Sr.1 (G)
LICMF Interval Fund - Monthly - Sr.1(D)
LICMF Interval Fund - Monthly - Sr.1(G)
LICMF Interval Fund - Qrtly - Sr.1 (D)
LICMF Interval Fund - Qrtly - Sr.1 (G)
LICMF Liquid Plus Fund (Div-D)
LICMF Liquid Plus Fund (Div-M)
LICMF Liquid Plus Fund (Div-W)
LICMF Liquid Plus Fund (G)
LICMF Short Term Plan - (D)
LICMF Short Term Plan - (G)
Liquid scheme:
 LICMF India Vision Fund (G)  LICMF Floating Rate Fund - STP (Div-W)

 LICMF Infrastructure Fund  LICMF Floating Rate Fund - STP (G)

(D)
 LICMF Liquid Fund - (G)
 LICMF Infrastructure Fund
(G)  LICMF Liquid Fund (Div-D)

 LICMF Opportunities Fund

(D)

 LICMF Opportunities Fund

(G)

 LICMF Tax Plan - (D)

 LICMF Tax Plan - (G)

 LICMF Top 100 Fund (D)

 LICMF Top 100 Fund (G)

HDFC Mutual Fund Plans:

Equity / Growth Fund Liquid Funds

 HDFC Mid-Cap Opportunities Fund  HDFC Cash Management Fund -

 HDFC Prudence Fund Savings Plan

 HDFC Liquid Fund Premium Plus
 HDFC Index Fund - Nifty Plan
Plan
 HDFC Capital Builder Fund
 HDFC Liquid Fund
 HDFC Infrastructure Fund  HDFC Cash Management Fund -
 HDFC Long Term Advantage Fund Call Plan
(ELSS)  HDFC Liquid Fund premium plan
 HDFC Index Fund - Sensex Plus Plan

 HDFC Core and Satellite Fund Debt/ Income Fund

HDFC Growth Fund  HDFC Floating Rate Income Fund - Long
 HDFC Tax Saver (ELSS) Term Plan
 HDFC Arbitrage Fund  HDFC High Interest Fund - Short term
 HDFC Premier Multi-Cap Plan
 HDFC Equity Fund- Growth  HDFC Multiple Yield Fund - Plan 2005
 HDFC Long Term Equity Fund  HDFC Cash Management Fund - Savings
 HDFC Balanced Fund Plus Plan
 HDFC Index Fund - Sensex Plan  HDFC Gilt Fund - Short Term Plan
 HDFC Top 200 Fund  HDFC Income Fund
 HDFC MF Monthly Income Plan - Short

Children's Gift Fund Term Plan

 HDFC Gilt Fund - Long Term Plan

 HDFC Children's Gift Fund - Savings Plan  HDFC High Interest Fund
 HDFC MF Monthly Income Plan - Long
 HDFC Children's Gift Fund - Investment
Term Plan
Plan
 HDFC Floating Rate Income Fund -Short
Term Plan
 HDFC Short Term Plan
NAV value of the plans:
Scheme/ date HDFC Equity Fund- SBI Magnum COMMA LICMF Equity Fund-
Growth Fund -Growth (Growth)

Monday, October 31, 2005 88.2950 9.8200 14.3852

Monday, November 28, 2005 100.5110 10.5700 15.9039
Friday, December 30, 2005 107.0090 10.9500 15.9089
Tuesday, January 31, 2006 113.0630 12.1700 17.6671
Monday, February 27, 2006 115.7450 12.5100 18.1360
Wednesday, March 29, 2006 126.3860 13.5800 19.6579
Friday, April 28, 2006 130.6070 16.2000 20.5878
Monday, May 29, 2006 119.1730 14.0800 17.6446
Thursday, June 29, 2006 109.7930 11.8900 15.4089
Monday, July 31, 2006 115.6700 12.4500 16.1771
Tuesday, August 29, 2006 127.3630 13.7900 16.1771
Friday, September 29, 2006 133.8080 14.4800 18.3342
Monday, October 30, 2006 139.4070 15.4700 19.8655
Tuesday, Nov… 28, 2006 143.9300 16.0500 20.7605
Friday, December 29, 2006 145.3860 16.0800 21.2689
Monday, January 29, 2007 151.9460 16.5400 22.5636
Monday, February 26, 2007 145.8800 15.2800 20.4645
Thursday, March 29, 2007 141.2130 14.2000 18.9464
Monday, April 30, 2007 151.1600 15.8600 20.8280
Tuesday, May 29, 2007 160.1700 16.8800 21.0251
Thursday, June 28, 2007 163.5090 17.4800 21.3006
Monday, July 30, 2007 168.1010 18.6200 22.5204
Wednesday, Aug.. 29, 2007 164.4060 18.3100 22.3072
Friday, September 28, 2007 182.8380 21.8900 25.1599
Monday, October 29, 2007 209.3570 26.1800 31.1340
Wednesday, Nov… 28, 2007 201.9560 26.4600 31.0336
Monday, December 31, 2007 223.3240 29.9100 34.7053
Tuesday, January 29, 2008 192.1230 24.5100 29.2991
Wednesday, Feb... 27, 2008 186.9590 24.7000 27.8625
Monday, March 31, 2008 165.7880 20.6500 22.4469
Monday, April 28, 2008 175.8090 22.4900 25.0160
Thursday, May 29, 2008 168.5470 21.7400 23.6541
Monday, June 30, 2008 143.1710 18.3700 19.0817
Tuesday, July 29, 2008 146.8590 18.5700 20.6038
Friday, August 29, 2008 158.9240 19.2500 21.3990
Tuesday, Sept… 30, 2008 145.7210 16.4600 19.2315
Wednesday, Oct… 29, 2008 105.6300 11.5800 13.3605
Friday, November 28, 2008 101.8080 11.1100 13.2428
Tuesday, December 02, 2008 98.3520 10.9100 12.8192

These NAV can be viewed on www.mutualfundsindia.com

250
200
150 HDFCEquity
October 30, 2006

Fund-Growth
100
29-Jun-06

30-Jun-08
28-Jun-07
27-Feb-06

26-Feb-07

27-feb-08
29-Oct-07

29-Oct-08

50
31-Oct-05

SBIM agnum
0 CO MM AFund-
G rowth
LICM FEquity
Fund- (Growth)

Performance Measures of Mutual Funds

Mutual Fund industry today, with about 34 players and more than five hundred schemes, is one of
the most preferred investment avenues in India. However, with a plethora of schemes to choose from,
the retail investor faces problems in selecting funds. Factors such as investment strategy and
management style are qualitative, but the funds record is an important indicator too. Though past
performance alone can not be indicative of future performance, it is, frankly, the only quantitative way
to judge how good a fund is at present. Therefore, there is a need to correctly assess the past
performance of different mutual funds.

Return alone should not be considered as the basis of measurement of the performance of a mutual
fund scheme, it should also include the risk taken by the fund manager because different funds will
have different levels of risk attached to them. Risk associated with a fund, in a general, can be
defined as variability or fluctuations in the returns generated by it. The higher the fluctuations in the
returns of a fund during a given period, higher will be the risk associated with it. These fluctuations in
the returns generated by a fund are resultant of two guiding forces. First, general market fluctuations,
which affect all the securities, present in the market, called market risk or systematic risk and second,
fluctuations due to specific securities present in the portfolio of the fund, called unsystematic risk. The
Total Risk of a given fund is sum of these two and is measured in terms of standard deviation of
returns of the fund. Systematic risk, on the other hand, is measured in terms of Beta, which
represents fluctuations in the NAV of the fund vis-à-vis market. The more responsive the NAV of a
mutual fund is to the changes in the market; higher will be its beta. Beta is calculated by relating the
returns on a mutual fund with the returns in the market. While unsystematic risk can be diversified
through investments in a number of instruments, systematic risk can not. By using the risk return
relationship, we try to assess the competitive strength of the mutual funds vis-à-vis one another in a
better way.

In order to determine the risk-adjusted returns of investment portfolios The most important and widely
used measures of performance are:

• The Treynor Measure

• The Sharpe Measure

• Jenson model (alpha ratio)

The Treynor Measure

Developed by Jack Treynor, this performance measure evaluates funds on the basis of Treynor's
Index. This Index is a ratio of return generated by the fund over and above risk free rate of return
(generally taken to be the return on securities backed by the government, as there is no credit risk
associated), during a given period and systematic risk associated with it (beta). Symbolically, it can
be represented as:

Treynor's Index (Ti) = (Ri - Rf)/Bi.

Where, Ri represents return on fund, Rf is risk free rate of return and Bi is beta of the fund.

The Sharpe Measure

In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is a ratio of
returns generated by the fund over and above risk free rate of return and the total risk associated with
it. According to Sharpe, it is the total risk of the fund that the investors are concerned about. So, the
model evaluates funds on the basis of reward per unit of total risk. Symbolically, it can be written as:

Sharpe Index (Si) = (Ri - Rf)/Si

Where, Si is standard deviation of the fund.

Jenson Model

Jenson's model proposes another risk adjusted performance measure. This measure was developed
by Michael Jenson and is sometimes referred to as the Differential Return Method. This measure
involves evaluation of the returns that the fund has generated vs. the returns actually expected out of
the fund given the level of its systematic risk. The surplus between the two returns is called Alpha,
which measures the performance of a fund compared with the actual returns over the period.
Required return of a fund at a given level of risk (Bi) can be calculated as:

Ri = Rf + Bi (Rm - Rf)

Where, Rm is average market return during the given period. After calculating it, alpha can be
obtained by subtracting required return from the actual return of the fund.

Higher alpha represents superior performance of the fund and vice versa. Limitation of this model is
that it considers only systematic risk not the entire risk associated with the fund and an ordinary
investor can not mitigate unsystematic risk, as his knowledge of market is primitive.

Calculation of Treynor and sharp ratio for selected mutual funds schemes:
Measures/ schemes HDFC equity fund SBI Magnum comma LICMF Equity Fund-
(Growth) fund ( Growth) (Growth)
Return on fund (Ri) 7.2% 6% 5%
Risk free rate of return (Rf) 9% 8% 7%
Beta 0.85 0.92 1.08
Standard deviation 5.09 5.71 6.48
Treynor ratio 7.2-9/0.85 6-8/0.92 5-7/1.08
(Ti) = (Ri - Rf)/Bi. = -2.11 = -2.17 = -1.85
Sharp ratio 7.2-9/5.09 6-8/5.71 5-7/6.48
(Si) = (Ri - Rf)/Si = -0.353 = -0.350 = -0.308

All risk-averse investors would like to maximize this value. While a high and positive Treynor's Index
shows a superior risk-adjusted performance of a fund, a low and negative Treynor's Index is an
indication of unfavorable performance.

While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a fund, a low
and negative Sharpe Ratio is an indication of unfavorable performance.
Findings:

• All these three mutual fund shows the unfavorable performance but HDFC equity growth plan
having the low negative value so it will be the greater performer over the past three year.
• Same as sharp ratio for SBI magnum comma fund growth and LIC equity fund growth are
having high negative value that depicts the performance of these plans are lower comparison
to HDFC equity growth plan.
Conclusion:
Sharpe and Treynor measures are similar in a way, since they both divide the risk premium by a
numerical risk measure. The total risk is appropriate when we are evaluating the risk return
relationship for well-diversified portfolios. On the other hand, the systematic risk is the relevant
measure of risk when we are evaluating less than fully diversified portfolios or individual stocks. For a
well-diversified portfolio the total risk is equal to systematic risk. Rankings based on total risk (Sharpe
measure) and systematic risk (Treynor measure) should be identical for a well-diversified portfolio, as
the total risk is reduced to systematic risk. Therefore, a poorly diversified fund that ranks higher on
Treynor measure, compared with another fund that is highly diversified, will rank lower on Sharpe
Measure

References:

www.mutualfundsindia.com

www.sbimutualfunds.com

www.hdfcmutualfunds.com

www.licmutualfunds.com

Books:

• Financial institutions and markets structure, Growth and innovation fourth edition by L.M.
Bhole (Tata McGraw-hill publishing company limited)
• The working of stock exchanges in India by H.R. machiraju

• Financial services by shashi k. gupta

• The Indian financial system markets, institutions and services by Bharati V. Pathak second
edition (pearson education)