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The Management

of Mutual Funds
G. V. Satya Sekhar

The Management of Mutual Funds

G.V.SatyaSekhar

The Management of
Mutual Funds

Dr. G.V.SatyaSekhar MBA, Ph.D


GITAM University
India

ISBN 978-3-319-33999-3
ISBN 978-3-319-34000-5
DOI 10.1007/978-3-319-34000-5

(eBook)

Library of Congress Control Number: 2016957419


The Editor(s) (if applicable) and The Author(s) 2017
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Contents

Introduction

Review ofLiterature

37

Corporate Governance

61

Benchmarking

95

Asset Management

109

Portfolio Management

133

Role oftheFund Manager

149

Appendix: Challenges Faced by Global Financial Markets,


19872007

167

vi

Contents

Bibliography

171

Index

177

List of Figures

Fig. 1.1 Mutual fund structure (Source: Prepared by author)

vii

List of Tables

Table 1.1
Table 1.2
Table 1.3
Table 1.4
Table 1.5
Table 4.1
Table 4.2

Table 4.3
Table 4.4

Table 4.5
Table 4.6

Mobilization of resources by mutual funds:


19871993 (Rs. crore)
Cumulative savings mobilized by financial
institutions during 19871993
A select private sector mutual fund and foreign
partners
Growth of the mutual fund industryAUM
Assets under management during April 2000
April 2015
UTI Equity Fund-comparison with benchmark
fund as on January 26, 2016
SBI Blue Chip FundDirect Plan (G)
(Rank 1)comparison with benchmark fund as
on January 26, 2016
Birla Sun Life Frontline Equity Fund (G)( Rank 2)
as on January 26, 2016
SBI Magnum Equity Fund (G) (Rank-3)
comparison with benchmark fund as on
January 26, 2016
HSBC Equity Fund (G)comparison with
benchmark fund as on January 26, 2016
HDFC Index Fund Sensex Plus PlanDirect Plan

14
15
15
18
20
101

101
102

102
103
103
ix

List of Tables

Table 4.7
Table 4.8
Table 4.9
Table 4.10
Table 5.1
Table 5.2
Table 5.3
Table 5.4
Table 5.5
Table 5.6.
Table 5.7
Table 5.8
Table 5.9
Table 5.10
Table 5.11
Table 5.12
Table 6.1
Table 6.2
Table 6.3
Table 6.4
Table 6.5
Table 6.6
Table 6.7
Table 6.8
Table 6.9
Table 6.10
Table 6.11
Table 6.12
Table 6.13
Table 6.14
Table 6.15
Table 6.16
Table 7.1
Table 7.2

HDFC Top 200 Fund (G)


Kotak 50Regular Plan (G)
IDBI India Top 100 Equity Fund (G)
ICICI Prudential Top 100 Fund (G)
Projections of assets under management by 2020
(in billion US $)
Changes to the MSMF Schemes
PEG ModelDerived by Peter Lynch
Product positioning
Asset managementUTI Equity Fund
Asset managementSBI Blue Chip FundDirect
Plan (G)
HDFC Index FundSensex Plus PlanDirect Plan
HDFC Top 200 Fund (G)
Birla Sun Life Frontline Equity Fund (G)
J.P.Morgan India Equity Fund (G)
Kotak 50Regular Plan (G)
IDBI India Top 100 Equity Fund (G)
ICICI Growth Plan Fund
Franklin India Bluechip Fund
UTI Mastershare Fund
Birla Advantage Fund
Overall performance of the funds
Ranking of select funds
UTI Equity Fund
SBI Blue Chip Funddirect plan (G)
Birla Sun Life Frontline Equity Fund (G)
SBI Magnum Equity Fund (G)
HDFC Index Fund Sensex Plus Plan Direct Plan
HDFC Top 200 Fund (G)
J.P.Morgan India Equity Fund (G)
Kotak 50 Regular Plan (G)
IDBI India Top 100 Equity Fund (G)
ICICI Prudential Top 100 Fund (G)
Average assets under management in India,
July to September 2015
Type of fund and nature of investment

104
104
105
105
114
118
120
121
124
124
125
125
125
126
126
126
140
141
141
142
142
143
144
144
144
145
145
145
146
146
146
147
157
159

1
Introduction

Background

The management of mutual funds is a multidimensional idea. It can be


understood in relation to the four pillars of mutual funds: corporate governance, benchmarking, asset management and portfolio management, in
addition to the active role of the fund manager. The concept of mutual funds
was conceived to pool the resources of small investors and deploy them in
the capital markets to help industrialization, through participation in equity
and debt instruments. The mutual fund industry imparts formal identity,
provides access to the payments system and to safety net-like savings deposit
insurance. More recently, the focus of the Indian government has been on
establishing the basic right of every person to have access to affordable basic
financial services offered by banking and non-banking companies.
Mutual funds are classified according to their tenure and investment
objectives. They may be open-ended or closed-ended, depending on the
tenure of the offer. They may be equity-oriented, debt-oriented, balanced,
sector-specific, exchange-traded and so on, according to investment
objectives. Thus, mutual funds can be categorized into the public or private sectors according to the institution by which they are offered.
The Author(s) 2017
G.V.S. Sekhar, The Management of Mutual Funds,
DOI10.1007/978-3-319-34000-5_1

The Management of Mutual Funds

A fund manager is generally an investment specialist, and has to have


an in-depth understanding of the capital markets so as to manage the
funds in a professional manner. We are aware that mutual funds are
managed by asset management companies, ideally with a hub of business qualifications and professional insight, who manage their shareholders funds and invest in a diversified portfolio, thereby reducing
the risk of investing in a single security. This inherent diversification of
portfolio that investors can achieve by investing in a mutual fund, coupled with the attraction of liquidity and transparency, has been a major
factor in the continuous growth of the mutual fund industry all over
the world. The fundamental aim of the fund manager of asset management companies and their mutual fund organizations is to minimize
risk to investors. An investor has the option to select any scheme of
mutual funds, which facilitates liquidity of investment. However, the
evaluation of the fund managers performance is dependent on the performance of the schemes and portfolio he or she manages, and is vital
for investors as well as portfolio managers. In general, professional fund
managers have expertise in managing investments to attract more investors. But they are facing challenges through redemptions, lower sales
and the fight for security. Recent developments have sown the seeds for
players to proactively participate in fund management. It is therefore a
good time for the mutual fund industry to consider the lessons learnt
in the past and develop a route for success through committed effort
and dedication.
It is a known fact that the important objective of mutual fund organizations is to provide income tax benefits to small and medium-size investors. Over the medium to long term, mutual funds have the potential and
objective to provide a high return as they invest in a diversified basket of
selected companies. The objective of mutual funds is to offer a variety of
schemes that enable investors to take advantage of opportunities not only
in the equity, debt and money markets but also in specific industries and
sectors. But the chief executive officer (CEO) of any mutual fund organization realizes that this may not be the only way in which mutual funds
can use their ingenuity and expertise to cater to the corporate sector and
to individual investors.

Introduction

It is interesting to note that many of these schemes invest in a single security that matures at a particular date, and most single investor
schemes are likely to be in this category. Such schemes are a negation of
the very concept of mutual funds, where expert investment managers are
supposed to hedge risk by investing in a basket of securities. Between
schemes that have just one investor and inter-corporate deposits in the
guise of mutual funds walking away with tax advantages, it is clear that
the Securities Exchange Board of India (SEBI) rules need a serious reexamination. It may also be useful to understand why retail investors are
not interested in mutual funds and to examine persistent charges that
many fund managers tend to front run their investment decisions despite
compliance rules.
In India, regulation of the financial sector has evolved as a product
of planned development, where the mobilization of savings and corresponding investments take place through the public sector at predetermined prices.
It is impossible for an investor, or for a trustee, to closely monitor
the management of the fund. Since monitoring inputs is not feasible,
the only way in which control can be exercised is by monitoring performance. The investor could try to select managers who have exhibited consistent returns in the past. A nave comparison of returns across
alternative funds, which is often done in India, is not helpful when there
are differences in the levels of risk adopted by different funds. Scientific
performance evaluation is necessary to examine the problem.

How Mutual Funds Work

A mutual fund is a common pool of money into which investors with


a common investment objective place their contributions, which are to
be invested in accordance with the stated investment objective of the
scheme. The investment manager invests the money collected from the
investor in assets that the stated objectives of the scheme permit. For
example, an equity fund invests in equity and equity-related instruments
and a debt fund invests in bonds and debentures (See Fig. 1.1).

The Management of Mutual Funds

REGULATOR/
MONITORING
AUTHORITY
SPONSOR-

TRUSTEE-

Supports fund

Creates fund
MUTUAL FUND
ORGANISATION &
Corporate Governance
FUND MANAGER /

Bench marking

AMC-Asset Management
Company

PORTFOLIO MANAGEMENT

DISTRIBUTOR
/Markeng and promong

SCHEMES/ Opons
Ready to invest

Fig. 1.1 Mutual fund structure (Source: Prepared by author)

2.1

Organization ofaMutual Fund

(a) Fund Sponsor: A sponsor is a person who, acting alone or in combination with another corporate body, establishes a mutual fund. In order
to register with SEBI as a mutual fund, the sponsor should have a sound
financial track record of over five years and integrity in all his business
transactions. Following its registration, in accordance with SEBI regulations, the sponsor forms a trust, appoints a Board of Trustees and an asset
management company (AMC) as a fund manager. Further, a custodian
is appointed to handle custodial services for the funds schemes. The
sponsor should contribute at least 40 % of the net worth of the AMC,
provided that any person who holds 40 % or more of the net worth of
an AMC should be deemed to be a sponsor, and is therefore required to
fulfill the eligibility criteria specified in the SEBI regulations.
(b) Trustees: The mutual fund can either be managed by the Board of
Trustees, which is a body of individuals, or by a Trust Company,
which is a corporate body. Most of the funds in India are managed by

(c)

(d)

(e)

(f )

Introduction

a Board of Trustees. The trustees are appointed with the approval of


SEBI.Two-thirds of trustees are independent persons and cannot be
associated with sponsors in any manner whatsoever. The trustees,
being the primary guardians of the unit holders funds and assets,
have to be persons of high repute and integrity. The Trustees, however, do not directly manage the portfolio of the mutual fund. This is
managed by the AMC as per the defined objectives, in accordance
with the trust deed and SEBI (MF) regulations.
Custodians: A custodian is appointed for safe keeping of the securities and participating in the clearing system through the approved
depository, also recording information on stock splits and other corporate actions. No custodian entity in which the sponsor or its associate holds 50 % or more of the voting rights of the share capital, or
where 50 % or more of the directors of the custodian represent the
interest of the sponsor or its associates, should act as custodian for a
mutual fund constituted by the same sponsor or any of its associate
or subsidiary companies.
Registrar and Transfer Agent: The registrar and the transfer agent
maintain records of the unit holders account. A fund may choose to
hire an independent party registered with SEBI to provide such services or carry out these activities in house. If work relating to the
transfer of units is processed in house, charges at competitive market
rates may be debited to the scheme. The registrar and the transfer
agent form the most vital interface between the unit holder and the
mutual fund. Most of the communication between these two parties
takes place through the registrar and the transfer agent.
Distributors/Agents: To send their products the length and breadth
of the country, mutual funds use the services of distributors or agents.
Distributors comprise banks, non-banking financial companies and
other distribution companies.
Corporate Governance: The corporate governance of financial institutions in developing economies is important for several reasons.
First, financial institutions have an overwhelmingly dominant
position in developing-economy financial systems, and are extremely
important engines of economic growth. Second, as financial markets
are usually underdeveloped, banks in developing economies are typically the most important source of finance for the majority of firms.

The Management of Mutual Funds

Third, as well as providing a generally accepted means of payment,


banks in developing countries are usually the main depository for the
economys savings.
(g) Benchmarking: Benchmarking is a process used in management,
particularly in strategic management, in which organizations evaluate various aspects of their processes in relation to best practice, usually within their own sector. This allows organizations to develop
plans on how to adopt such best practice, usually with the aim of
increasing some aspect of their performance. Benchmarking may be
a one-off event, but is often treated as a continuous process in which
organizations continually seek to challenge their practices. A process
similar to benchmarking is also used in technical product testing and
in land surveying.
(h) Asset Management Company (AMC): The AMC, appointed by the
sponsor or the Trustees and approved by SEBI, acts like the investment manager of the Trust. The AMC should have at least a net
worth of Rs. 10 crore. It functions under the supervision of its Board
of Directors, Board of Trustees and the SEBI. In the name of the
trust, AMC floats and manages different investment schemes as per
the SEBI Regulations and the Investment Management agreement
signed with the Trustees. The regulations require a non-interfering
relationship between the fund sponsors, trustees, custodians and
AMC.
(i) Portfolio Management: Portfolio management is the process of
investing the funds collected from investors in various places. A riskaverse portfolio manager is delegated to manage a fund, and his portfolio construction (and information-gathering) efforts are not directly
observable to investors.

Type ofSchemes inMutual Funds

There are two types of scheme offered in mutual funds:


1. Open-ended schemes
2. Closed-ended schemes

Introduction

1. Open-Ended Schemes In open-ended funds, the sale and re-purchase


of units happens on a continuous basis, at net asset value (NAV) related
prices, from the fund itself. Units are bought and sold at their current
NAV.Open-end funds keep some portion of their assets in the short term
and use money market securities to provide available funds for redemptions. A large portion will be invested in highly liquid securities, which
enables the fund to raise money by selling securities at prices very close
to those used for valuations. The market price will be determined by the
NAV.In open-ended funds the NAV is calculated daily.
Ex: HDFC Growth fund, Top 200, Core and Satellite etc.
The objective of open-ended schemes is to generate long-term capital
appreciation. These schemes have both entry load and exit load. The
minimum investment should be INR 5000 and in multiples of 100
thereafter.
2. Closed-Ended Schemes These are issued to the public through an initial public offering (IPO). These funds have a stipulated maturity period
ranging from three 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 exchange where they are listed. If the investor
wants to redeem the units they can do so after the maturity period. For
closed-ended funds, investor approval is required for all cases of mergers
and take overs. The NAV will be calculated once a week for closed-ended
schemes.

3.1

Risk Factors ofInvestments inMutual Funds

(a) Mutual funds, like securities investments, are subject to market and
other risks and there can be no assurance that the objectives of any of
the schemes of the fund will be achieved.
(b) The NAV of units issued under the schemes can go up or down
depending on the factors and forces affecting capital markets, and
may also be affected by changes in the general level of interest rates.

The Management of Mutual Funds

(c) The past performance of the mutual funds managed by the sponsors
and their affiliates/associates is not necessarily indicative of the future
performance of the schemes.
(d) The sponsors are not responsible or liable for any loss resulting from
the operation of the schemes beyond the initial contribution of an
amount of Rs. 1 lakh made by the sponsors towards setting up the
fund or such other accretions and additions that may be made to the
initial corpus set up by the sponsors.
(e) The liquidity of the schemes investments may be restricted by trading volumes, settlement periods and transfer procedures. In the event
of an inordinately large number of redemption requests or of a
restructuring of any of the schemes portfolios, the time taken by the
fund for redemption of units may become significant. Investors are
also requested to peruse the risk factors and special considerations.
The right to limit redemptions is detailed in the offer documents of
the respective schemes of the fund.

Historical Background ofGlobal Mutual


Funds1

Adriaan Van Ketwich, a Dutch merchant, theorized in 1774 that diversification would increase the appeal of investments to smaller investors with
minimal capital. The investment company Socit Gnrale des PaysBas Pour favoriser lindustrie nationale,2, launched in the Netherlands
in 1822 by King William I, may be treated as the first mutual fund.
The name of van Ketwichs fund, Eendragt Maakt Magt, translates as
unity creates strength. The next wave of near-mutual funds included
an investment trust launched in Switzerland in 1849, followed by similar
vehicles created in Scotland in the 1880s. The idea of pooling resources
and spreading risk using closed-end investments soon took root in Great
Britain and France, making its way to the United States in the 1890s. The
Boston Personal Property Trust, formed in 1893, was the first closed-end
fund in the USA.
1
2

Satya Sekhar, GV (2014), The Indian Mutual Fund Industry, Palgrave Macmillan.
Robert O Edmister (1980), Financial Institutions Markets and Management, McGraw Hill.

Introduction

The creation of the Alexander Fund in Philadelphia, Pennsylvania, in


1907 was an important step in the evolution toward what we know as
the modern mutual fund. The first open-ended company, Massachusetts
Investors Trust, was founded on March 21, 1924, but it failed to gain
much favor with investments during the 1920s and suffered along with
other kinds of investment companies. Their growth began in about 1940
with the passing of the Investment Companies Act, USA.3 Since 1940,
there have been three different types of investment companies established: (a) open-ended funds, (b) closed-ended funds and (c) unit investment trusts.
The Alexander Fund featured semi-annual issues and allowed investors to make withdrawals on demand. In 1971, William Fosse and John
McQuoin of Wells Fargo Bank established the first index fund, and the
first retail index fund was formed in 1976 by John Bogle. Worldwide
assets in mutual funds have grown from $2,853 trillion at year end 1991
to $6,404 trillion at year end 1996. For the same period mutual fund
assets grew at an average annual compound rate of 13.3 %. As of October
2007, there were 8,015 mutual funds that belong to the Investment
Company Institute (ICI), a national trade association of investment
companies in the USA, with combined assets of $12,356 trillion.4

The Arrival oftheModern Fund

The first modern investment company, Scottish-American Investment


Company, was founded in London in 1860 at the beginning of a stock
market boom that lasted until 1875. By then, there were over 50 investment companies in Britain. Many of them failed in the stock market crisis
of 1890, and public interest in the stock market waned until the boom of
the 1920s renewed it. The creation of the Massachusetts Investors Trust
in Boston, Massachusetts, heralded the arrival of the modern mutual fund
in 1924. The fund went public in 1928, eventually spawning the mutual
fund firm known today as MFS Investment Management. State Street
Investors Trust was the custodian of the Massachusetts Investors Trust.
3
4

Harry C Sauvan (1973), Investment Management, Prentice Hall Inc., 4th edn.
Investment Companies report by U.S.Securities and Exchange Commission, Dec, 2007.

10

The Management of Mutual Funds

Later, State Street Investors started its own fund in 1924 with Richard
Paine, Richard Saltonstall and Paul Cabot at the helm. Saltonstall was
also affiliated with Scudder, Stevens and Clark, an outfit that would
launch the first no-load fund in 1928. A momentous year in the history
of the mutual fund, 1928 also saw the launch of the Wellington Fund,
which was the first mutual fund to include stocks and bonds, as opposed
to direct merchant bank-style investments in business and trade.
It was during the 1920s that investment companies first became important in the USA.They had existed since the 1890s, but by 1923 there
were only 15 with total assets of no more than $15 million. However, as
stock prices soared in the late 1920s, and small investors rushed to get in
on the action, investment companies mushroomed. By 1929, there were
some 400, with $3 billion assets. Most of these early investment companies were closed-end companies. Some offered families of trusts with
differing investment objectives, much like the mutual funds of today. The
stock market collapse between 1929 and 1933 was, of course, a catastrophe for the investment companies.
In the UK and the USA, regulators are putting more emphasis on
transparency of commissions offered by mutual fund organizations rather
than a ban on offering commission to the investors.5 Mark Carhart (1997)
found that nearly 1,500 US mutual funds underperformed the market in
approximately half the years between 1962 and 1992.6
The 1930s saw the relatively rapid growth of companies which opted
for open-ended schemes, partly because of the disrepute into which the
closed-end companies had fallen. The Massachusetts Investors Trust fund
was formed in Boston in 1924. It promised to redeem its shares at net
asset value less $2 per share. Interest in mutual funds picked up again
after World War II, when the stock market revived. During the period
19451965, mutual funds grew at an average rate of 18 % a year. There
were around 270 funds with $50 billion, and the number of shareholders
grew from 3 million to over 50 million.
5

Rajan Mehata (2003), Indian Mutual Fund Industry-Challenging Issues, Chartered Financial
Analyst, December, pp.3233.
6
Mark Carhart (1997), On Persistence in Mutual Fund Performance, Journal of Finance, March,
5682.

Introduction

11

History oftheMutual Fund Industry


inIndia

The mutual fund industry in India originated by way of the establishment of the Unit Trust of India (UTI), an initiative of the government of
India and the countrys Reserve Bank (RBI).This has led to the emergence
of mutual funds as the preferred investment vehicle. The Indian mutual
fund industry has been growing, but is still not big enough to make its
presence felt. A thorough understanding of the growth process of the
mutual fund industry can be broadly divided into four distinct phases.

6.1

Phase I(19641987) Establishment ofUTI

The Unit Trust of India (UTI) started its operations in 1963, with the
enactment of the UTI Act in parliament. The then Finance Minister,
Mr. T.T. Krishnamacharya, who piloted the bill, made it clear that
UTI would provide an opportunity for the middle and lower income
groups to acquire without much difficulty, property in the form of
shares, this institution is intended to cater mainly to the needs of individual investors, whose means are small. UTI started its operations
in 1963 with the premier scheme, an open-ended unit scheme, popularly referred to as US-64, being launched on July 1, 1964. In the
very first year it garnered Rs. 24.67 crore. This is an example of a load
fund scheme along with CANCIGO and CANGILT. UTI came forward with a number of schemes in the first phase itself, owing to the
immense popularity of its US-64; while UTI launched a re-investment
plan (automatic re-investment of dividends to US-64 unit holders)
in 19661967 and 1971, which provided insurance benefits besides
growth of investment.
However, in 1978 UTI was delinked from the RBI, and the Industrial
Development Bank of India (IDBI) took over the regulatory and administrative control in its place. At the end of 1988 UTI had Rs. 6,700 crore
of assets under management.

12

6.2

The Management of Mutual Funds

Phase II (19871993) Entry ofPublic Sector


Funds

The monopoly of UTI came to an end in 1987, when the government of


India amended the Banking Regulation Act to enable Public Sector Banks
to start subsidiaries that could undertake mutual fund business. Hence
1987 marked the entry of non-UTI.Declining profitability forced commercial banks, particularly public sector banks, to search for new avenues
of income. As such they started opening separate departments or setting
up subsidiaries to handle a variety of business transactions. One of the
new avenues of income was mutual funds.
Public sector banks started setting up public sector mutual funds. The
first public sector mutual fund was launched by the State Bank of India
with India Capital Market Ltd (November 1987), followed by Can Bank
Mutual Fund (December 1987), Punjab National Bank Mutual Fund
(August 1989), Indian Bank Mutual Fund (November 1989 ), Bank of
India (June 1990) and Bank of Baroda Mutual Fund (October 1992).
The first insurance company to enter the field of mutual funds, and it
was followed by General Insurance Corporation (GIC). The LIC Mutual
Fund was launched in June 1989 as a trust, while GIC set up its mutual
fund in December 1990.
LIC Mutual Fund is a private trust that has the aim of mobilizing individual savings, particularly in rural and semi-urban areas and to utilize
investments that would stimulate industrial and economic development
throughout the country. It also assured a reasonable rate of return, liquidity and safety of investment. LIC Mutual Fund acts as a link between
individual property and national progress. During the second phase of
development, nine mutual fund companies were set up by the public sector banks and two by the investment institutionsLIC and GIC.
The orderly growth of the mutual fund industry was to a great extent
affected by the irregularities in securities and banking transactions,
popularly known as the securities SCAM, which was unearthed in April
1992. This affected the industry in that players in the market were prohibited from launching further schemes. They were asked to restructure
themselves into separate asset management companies, with trustees

Introduction

13

and custodians, and developed an arms length relationship with their


sponsors. This meant that mutual funds did not introduce any new
schemes for almost a year, the only exception being UTI, the market
leader. It was during this period that SEBI notified regulations (1993)
for all mutual funds except UTI, under a common regulatory framework for the first time.
Table 1.1 represents data relating to mobilization of resources during
19871993 by UTI and other public sector organizations. UTI was
the only mutual fund institution functioning up to 19861987; hence
it showed a tremendous increase in resource mobilization, over 90 %.
The contribution of UTI to the mobilization of resources fluctuated
over these seven years. UTI slowly started to raise its funds year by
year. Initially it raised 1,000 to 2,000 crore of rupees difference, but
by 19911992 UIT mobilized Rs. 6,753 crore, which increased to Rs.
11,057 crore by the year 19921993, showing a remarkable growth of
5,000 crore of rupees.
Other public sector organizations entered the sector in the year
19871988. Their first year was not encouraging, showing only 132 crore
of the resources mobilized with fluctuations in the amount of mobilized
resources. During 19901991 and 19911992, these mutual funds had
a significant impact, as they mobilized 50.35% and 37.80% in these
two periods. By the end of 19911992 the total amount mobilized had
reached Rs. 4,105 crore. However, the contribution declined in the year
19921993 to only Rs. 1,964 crore.
Table 1.2 reflects cumulative savings mobilized by various financial
institutions in India. The amount of savings mobilized by the financial
institutions increased from Rs. 4,814 crore during 19871988 to Rs.
37,887 crore during 19921993. In other words, the simple index was
raised by 7.8 times. The number of investors was increased by eight times;
in other words, there were only 31.01 lakh investors during 19871988,
which was increased to 248.5 lakh by the year 19921993. However,
average savings per investor was highest during the year 19901991
at Rs. 26,089, but this reduced to Rs. 15,246 by the end of the year
19921993. It can be concluded that the number of investors increased
but average savings per investor decreased.

100
93.9
72.5
86.16
49.65
62.20
84.92

Percentage (%)

132
1,488
897
3,274
4,105
1,964

6.1
27.85
13.84
50.35
37.80
15.08

Percentage (%)

RBI annual report, 19941995, the data represents resource mobilization by year

1,261.06
2,059.4
3,855
5,583.5
4,122.1
6,753.1
11,057

19861987
19871988
19881989
19891990
19901991
19911992
19921993

UTI

Year

Other public
sector
organizations

Table 1.1 Mobilization of resources by mutual funds: 19871993a (Rs. crore)

1,261.06
2,191.40
5,343.00
6,480.50
7,396.10
10,858.40
13,021.00

Total
100
100
100
100
100
100
100

Percentage (%)

14
The Management of Mutual Funds

Introduction

15

Table 1.2 Cumulative savings mobilized by financial institutions during


19871993a

Year

Savings
mobilized
(Rs. Crore)

Simple
index

No. of
investors
(in Lakhs)

Simple
index

Mobilization of
savings per
investor (Rs)

19871988
19881989
19891990
19901991
19911992
19921993

4,814
7,162
12,553
21,301
27,193
37,887

100
148.8
260.8
442.4
564.28
787

31.01
40.5
52.95
81.65
117.5
248.5

100
130.6
170.7
263.3
379
801

15,525
17,683
23,708
26,089
23,143
15,246

Note: Simple Index is calculated based on the year 19871988


a
RBI Annual Report, 19941995
Table 1.3 A select private
Mutual fund
sector mutual fund and
Alliance
foreign partners
Chodamandalam
Kothari
ICICI
Sun F & C
Sundaram
Templeton
Zurich

6.3

Foreign partner
Alliance capital, USA
Cazenove Fund Management
Company, UK
Pioneer group Inc, USA
Prudential Corporation, USA
Foreign and colonial Emerging
Markets Ltd, UK
Newton Asset Management, UK
Franklin Templeton
Zurich Finance, Mauritius

Phase III (19932003): Entry ofPrivate Sector


Mutual Funds

The mutual fund industry saw major growth in the decade 19932003.
The amendment of the Banking Regulation act during 1987 permitting
public sector banks and financial institutions to set up mutual funds
brought in significant changes. Since 1993 the government has allowed
private sector companies to enter the industry, which has led to a new era
in which Indian investors have been given a wider choice of fund families. The first mutual fund regulation act came into existence in 1993,
and under this all mutual funds (except UTI) were to be registered and
governed. Table 1.3 depicts a select private sector mutual fund and its
foreign partners.

16

The Management of Mutual Funds

The entry of private sector mutual funds injected a certain character


into the mutual fund industry, as well as changes and competition. One
reason for this was that most of the private sector mutual funds had tieups with foreign investment companies which facilitated better research
and investment analysis. The other reason was a new and healthy trend in
which private sector mutual funds provided information on NAV more
frequently for the benefit of the investor. This also led to improved disclosure of necessary information to investors, so they could make less risky
and more profitable investment decisions.
The first private sector mutual fund was Kothari Pioneer Mutual
Fund (now merged with Franklin Templeton), which was registered
in July 1993. It launched an open-ended prima fund in November
1993 .During 19931994 four other private sector mutual funds were
launched, by Morgan Stanley Mutual Fund, ICICI Mutual Fund, 20th
century Mutual Fund and Taurus Mutual Fund. These five mutual funds
launched seven schemes and mobilized Rs. 1,559.6 crore during their
first year, 19931994. During 19941995 six more private sector mutual
fundsfrom Apple, JM, Shriram, CRB, Alliance and Birlaentered the
market.
Because of increasing competition, the existing mutual funds had to
perform better not only in terms of offering better returns, but also in
terms of better services. As a result, new schemes which seemed to be
customer made for the needs of the investors made their entry into the
market, and by January 2003 there were 33 mutual funds.
The 1993 SEBI (Mutual Fund) Regulations were replaced by more
comprehensive and revised regulations in 1996, and the industry now
functions under the SEBI (Mutual Fund) Regulations 1996. A financial
regulatory framework has to specify the type of role the state can play; the
objectives of state policy for regulation, activities that are to be performed;
and finally the way in which regulatory activities may be implemented.7
When the first crop of private sector-sponsored mutual funds (such as
Kothari Pioneer, 20th Century Finance and Apple Finance) debuted in
19931994, they had a difficult time weaning investors away from the
UTI and the public sector bank-sponsored funds. The bull market of 1994
7

Mathur KBL (2004), Regulation of Indias Financial Sector: The States Role, Economic and
Political Weekly, 20 March, pp.125358.

Introduction

17

and the subsequent IPO boom changed all this. With retail investors tasting the power of equity, a spate of private equity funds made their debut in
19941995. Funds such as Apple Midas, Gold Share and Morgan Stanley
Growth Fund drew retail investors in large numbers. After the upsets of
19941995, many more private sector funds threw their hat into the ring,
some of them big global names such as Alliance Capital, the Templeton
Group, Newton and Principal Financial. With a lull in the equity market,
fund houses spent this period expanding their portfolio of debt offerings.
Alongside the debt funds came the gilt, liquid, cash funds and treasury
management plans to cater to high net worth and corporate investors.
There was also a slew of balanced and hybrid fund launches. During this
period, assured return schemes from the UTI and the bank-sponsored
funds were buffeted by controversy. This was followed by the crisis in US
64 bonds. These events helped drive the concept of market-linked returns
firmly into the minds of investors, and this put private sector fund houses
firmly back on the radar screens of investors. The assets under management
of private sector mutual funds have crossed Rs. 50,000 crore in August
2002. At the end of August, these funds had assets of Rs. 51,820 crore with
a share of 48.2 %. The following are the other pointers from fund flows
into and out of mutual funds in August 2002. Net inflows were higher in
August than in the last six months at Rs. 3,801 crore. Sales were Rs. 21,314
crore and repurchases/redemption Rs. 17,513 crore. Almost the entire net
flows were into income schemes, with regular income schemes taking in
Rs. 3,119 crore and short-term funds of Rs. 845 crore. Balanced funds
witnessed outflows while equity funds had marginal inflows.

6.4

Phase IV (Since February 2003)

In February 2003, following the repeal of the Unit Trust of India Act
1963, UTI was split into two separate entities. One was the specific
undertaking of UTI with assets under management (AUM) of Rs. 29,835
crore as of the end of January 2003, which badly represented the assets
of the US-64 scheme. The specified undertaking of UTI functions under
an administrator and under the rules framed by the government of India,
and does not come under the purview of the mutual fund regulations.

18

The Management of Mutual Funds

Table 1.4 Growth of the mutual fund industryAUM


Phase

Beginning of the
year

Assets under management (AUM)


(Rs. in Crore

I
II
III
IV

1964
1988
1994
Jan. 2003

25
6700
61,028
1,21,805

The second is the UTI MF Ltd, sponsored by SBI, PNB, BOB and
LIC. It is registered with SEBI and functions under the mutual fund
regulations. With the bifurcation of the erstwhile UTI in March 2000,
there were more than Rs. 76,000 crore of assets under management and a
UTI mutual fund was set up, conforming to the SEBI mutual fund regulations. With recent mergers taking place among different private sector
funds, the mutual fund industry had entered the current phase of consolidation and growth. The different phases of growth of the mutual fund
industry and their assets at the beginning of each phase are presented in
Table 1.4. At the end of January 2003, there were 33 mutual funds with
total assets of Rs. 121,805 crore.
The number of mutual fund houses went on increasing, with many
foreign mutual funds setting up funds in India and the industry witnessing several mergers and acquisitions. UTI with Rs. 44,541 crore of
assets under management was way ahead of other mutual funds. The
reform measures were initiated in India in 1993 with three objectives: to
protect investors so as to generate the confidence necessary for mobilizing resources and to generate competition; to improve efficiency; and to
promote innovations.8

Latest Position inMutual Funds


(20052015)

In the last ten years the mutual fund industry in India has had a most successful phase, some research showing that the growth in the number of
schemes offered by Indian mutual funds has risen from 403in 20022003
8

Vyuptakesh Sharan (2007), Reforming Mutual Funds in India, Indian Journal of Commerce,
60(4), OctoberDecember, pp.7787.

Introduction

19

to 1,294in 201112, showing the positive view that investors have of


mutual funds. The AUM has shown a tremendous growth since its inception, from 25 crore in 1965 to 12.02 lakh crore in February 2015, the
highest ever registered AUM in the industry, with AUM growing at 15 %
to 25 % between 2010 and 2015.
The Indian mutual fund industry with assets under management rose
from 1.76 %, that is, Rs. 208.40 billion, to Rs. 12.02 trillion in February
2015 (AMFI). In July 2015 AUM grew by 31 %, while the share of equity
oriented funds rose to 30 % from 25 % in July 2014. Mutual funds
made a net investment of Rs. 34,004 crore in the secondary market in
January 2015 compared to a net investment of Rs. 60,969in December
2014. (SEBI bulletin February 2015). Mutual funds invested Rs. 33,124
crore in the debt market in January 2015 as opposed to Rs. 53,932 crore
in December 2014. Mutual funds as an investment vehicle have gained
immense popularity, which is clearly reflected in the robust growth levels of AUM.India is undoubtedly emerging as the next big investment
destination, riding on high savings and investment rate, as compared to
other Asian economies.
In India the trend of rising personal incomes has been witnessed not
only amongst the young population, comprising 50 % of Indias people.
Since the 1990s, when the mutual fund space opened up to the private
sector, the industry has traveled a long path, adapting itself continuously
to the changes that have come along. In todays volatile market environment, mutual funds are looked upon as a transparent and low cost
investment vehicle; they attract their fair share of investor attention,
which helps to spur the growth of the industry. With the AUM growing
at 1525 % between 2010 and 2015, the regulatory regime kept pace
with the changing environment, and the AUM of the asset management
industry grew from 470 billion INR in 1993 to 1396 billion INR in
2004 and to 8252 billion INR in 2014.
Table 1.5 reveal that the investors prefer private sector mutual funds
as opposed to public sector mutual funds. The share of private sector
mutual funds has increased from 79.42 % in the year 20082009 to
84.49 % in the year 20142015 (up to April 2015). UTI and other
public sector mutual funds have increased by 20.28 % contribution in
assets under management by the year 20082009 and it was drastically

UTI

6,628
7,702
9,368
20,617
20,740
29,519
35,488
56,584
48,754
80,218
67,189
58,922
69,450
74,233
92,751

Year

20002001
20012002
20022003
20032004
20042005
20052006
20062007
20072008
20082009
20092010
20102011
20112012
20122013
20132014
20142015

7.32 %
7.66 %
8.57 %
14.77 %
13.86 %
12.73 %
10.88 %
10.29 %
10.10 %
10.94 %
9.89 %
9.06 %
8.53 %
8.22 %
7.81 %

Percentage
58,017
51,434
43,351
11,912
11,374
20,829
28,725
45,908
50,607
83,295
55,453
52,032
69,393
84,189
91,428

Others
64.05 %
51.13 %
39.66 %
8.53 %
7.60 %
8.98 %
8.80 %
8.35 %
10.48 %
11.36 %
8.16 %
8.00 %
8.52 %
9.32 %
7.70 %

Percentage

Table 1.5 Assets under management during April 2000April 2015


25,942
41,459
56,581
107,087
117,487
181,515
262,079
447,174
383,466
569,421
556,820
539,273
675,456
744,539
1,003,298

Private
28.64 %
41.21 %
51.77 %
76.70 %
78.53 %
78.29 %
80.32 %
81.35 %
79.42 %
77.69 %
81.95 %
82.94 %
82.95 %
82.46 %
84.49 %

Percentage
90,587
100,594
109,299
139,616
149,600
231,862
326,292
549,666
482,827
732,934
679,462
650,227
814,299
902,961
1,187,477

Total

20
The Management of Mutual Funds

Introduction

21

declined to 7.81 % by the year 20142015. In the case of private sector mutual funds, this situation was reversed, with their contribution of
26.64 % during 20002001 was significantly raised to 81.31 % by the
year 20072008.

Benets ofMutual Funds

(a) Professional Management: Making investments is not a full-time


occupation for investors, so they can hardly have a professional attitude towards investment. When an investor buys into a mutual fund
scheme, he is assisted by experts, and therefore an investor acquires
an essential benefit of expert management of money. The professional
money manager will use the money invested in mutual funds to buy
and sell stocks after careful research; hence the investor passes on the
burden of research on every investment to the mutual fund money
manager.
(b) High Value of Diversification: A sound investment policy, for both
large and small investors, is based on the principle of asset diversification. The main theme of this concept is not to put all eggs in one
basket. By investing in diversified companies the mutual funds
protect themselves from the unexpected drop in value of some shares.
The small investor cannot achieve diversification on his own for
many reasons. Mutual funds pool funds from various investors and
thus participate in different company shares.
(c) Easy Liquidity: An advantage of a mutual fund over other investments is that there is always a market for its shares/units. Moreover,
SEBI requires that mutual funds in India have to ensure liquidity.
Mutual fund units can be sold in the share market, as SEBI has made
it mandatory to list closed-ended schemes. For open-ended schemes,
investors can always approach the fund for re-purchase at the schemes
NAV.
(d) Reduced Risks: Risk in investment involves the recovery of the principal amount and its return. Mutual fund investments provide a
comfortable situation for investors. The expert supervision, diversification and liquidity of units minimize the risk.

22

The Management of Mutual Funds

(e) Investment Protection: Besides depending on the expert supervision


of fund managers, regulatory bodies such as SEBI in India and
Securities Exchange Commission (SEC) in the USA provide for the
safety of investments. Mutual funds have to follow the provisions laid
down for their regulation. These agencies act as watchdogs that safeguard investors interests.
(f ) Switching: Mutual funds provide investors with flexible investment
opportunities. Investors are able to switch over from one fund to
another: from an income scheme to a growth scheme or vice versa, or
from a closed-ended to an open-ended scheme.
(g) Low Operating Costs: Mutual funds with large dispensable funds
target economies of scale. The brokerage fee or trading commission
may be reduced substantially. Reduced operating costs obviously
increase the income available for investors.
Investing in securities through mutual funds has many advantages over
a personal portfolio. Other advantages, apart from those listed above,
include the option to re-invest dividends, the strong possibility of capital
appreciation and regular returns. Mutual funds are also in the national
interest, as they are able to mobilize additional savings and channel them
to more productive sectors of the economy.

Constitution ofMutual Funds

(a) Custodians: There is substantial work involved in a mutual fund in


managing the scrips that are bought from and sold in the market.
Their safe custody and ready availability needs to be ensured. SEBI
requires that each mutual fund should have a custodian who is not in
any way associated with the AMC.Such a custodian cannot act as
sponsor or trustee of any mutual fund. Further, a custodian is not
permitted to act as a custodian of more than one mutual fund without the prior approval of SEBI.A custodians main assignment is the
safe keeping of the securities and participation in clearing systems on
behalf of the client to effect delivery of the securities. The custodian,

Introduction

23

depending on the terms of the agreement, also collects income/dividends on the securities. Some of the other associated assignments of
custodians are:
Ensuring delivery of scrips only on receipt of payment and payment only upon receipt of scrips.
Regular reconciliation of assets to accounting records.
Timely resolution of discrepancies and failures.
Ensuring securities are properly registered or recorded.
Depending on the volume of transactions there may be co-custodians
for a mutual fund. These custodians are entitled to receive custodianship
fees, based on the average weekly value of net assets or sale and purchase
of securities, along with per certificate custody charges.
(b) AMC (Investment Manager): The sponsor or the trustees appoint an
AMC to manage the affairs of the mutual fund. The AMC manages
all the schemes of the fund. An AMC can only act as a trustee of one
mutual fund. An AMC is not permitted to undertake any business
activity except management and advisory services to offshore funds,
pension funds, provident funds, venture capital funds, management
of insurance funds, financial consultancy and exchange of research
on a commercial basis, if these activities are not in conflict with the
activities of the mutual fund. It can also operate as an underwriter
provided it is registered under SEBI (Merchant Bankers) Regulations.
To ensure efficient management, SEBI requires that existing AMCs
should have a sound track record (good net worth, dividend paying capacity, profitability, etc.), a good general reputation and fairness
in transaction. The directors of an AMC should be experts in relevant
fields, such as portfolio management, investment analysis and financial
administration, because all AMCs are involved in these three activities.
An AMC is expected to operate independently. SEBI regulations require
that at least 50 % of directors do not have any association with sponsor
or trustees. The AMCs chairman should be an independent person. To

24

The Management of Mutual Funds

ensure the stake that sponsors hold in the AMC, it is required that at least
40 % of its net worth should be contributed by the former AMC, itself
being financially sound, and that it should have a net worth of at least
Rs. 10 crore.

9.1

Portfolio Classication

Here, classification is on the basis of nature and type of securities and the
objective of investment.
(a) Income funds: The aim of income funds is to provide safety of
investments and regular income to investors. Such schemes invest
predominantly in income-bearing instruments such as bonds, debentures, government securities and commercial paper. The return as
well as the risk is lower in income funds as compared to growth
funds.
(b) Growth funds: The main objective of growth funds is capital appreciation over the medium to long term. They invest most of the corpus in equity shares with significant growth potential and they offer
a higher return to investors in the long term. They assume the risks
associated with equity investments. There is no guarantee or assurance
of returns. These schemes are usually closed-ended and listed on
stock exchanges.
(c) Balanced funds: The aim of a balanced scheme is to provide both
capital appreciation and regular income. They divide their investment between equity shares and fixed price instruments in such a
proportion that the portfolio is balanced. The portfolio of such funds
usually comprises companies with good profit and dividend track
records. Their exposure to risk is moderate and they offer a reasonable rate of return.
(d) Money market mutual funds: They specialize in investing in shortterm money market instruments such as treasury bills, and certificate
of deposits. The objective of such funds is high liquidity with a low
rate of return.

9.1.1

Introduction

25

Geographical Classification

(a) Domestic funds: Funds which mobilize resources from a particular


geographical locality such as a country or region are domestic funds.
The market is limited and confined to the boundaries of the nation
in which the fund operates. They can invest only in the securities
which are issued and traded in the domestic financial markets.
(b) Offshore funds: Offshore funds attract foreign capital for investment in the country of the issuing company. They facilitate crossborder fund flow, which leads to an increase in foreign currency and
foreign exchange reserves. Such mutual funds can invest in securities
of foreign companies. They open domestic capital market to international investors. Many mutual funds in India have launched a number of offshore funds, either independently or jointly with foreign
investment management companies. The first such, the India Fund,
was launched by Unit Trust of India in July 1986in collaboration
with the US fund manager Merrill Lynch.

9.1.2

Others

(a) Sectoral: These funds invest in specific core sectors such as energy,
telecommunications, IT, construction, transportation and financial
services. Some of these newly opened-up sectors offer good investment potential.
(b) Tax saving schemes: Tax-saving schemes are designed on the basis
of tax policy, with special tax incentives to investors. Mutual funds
have introduced a number of tax saving schemes. These are closedended schemes and investments are made for ten years, although
investors can avail themselves of encashment facilities after three
years. These schemes contain various options such as income, growth
or capital application. The latest scheme to be offered is the
Systematic Withdrawal Plan (SWP), which enables investors to
reduce their tax incidence on dividends from as high as 30 % to as
low as 3 to 4 %.

26

The Management of Mutual Funds

(c) Equity-linked savings scheme (ELSS): In order to encourage investors to invest in the equity market, the government has given tax
concessions through special schemes. Investment in these schemes
entitles the investor to claim an income tax rebate, but these schemes
carry a lock-in period before the end of which funds cannot be
withdrawn.
(d) Special schemes: Mutual funds have launched special schemes to
cater to the special needs of investors. UTI has launched special
schemes such as Childrens Gift Growth Fund, 1986, Housing Unit
Scheme, 1992 and Venture Capital Funds.
(e) Gilt funds: Mutual funds which deal exclusively in gilts are called
gilt funds. With a view to creating a wider investor base for government securities, the RBI encouraged them. These funds are provided
with liquidity support by the RBI.
(f ) Load funds: Mutual funds incur certain expenses for brokerage,
marketing and communication, for example. These expenses are
known as load and are recovered by the fund when it sells the units
to investors or re-purchases the units from withholders. In other
words, load is a sales charge, or commission, assessed by mutual
funds to cover their selling costs. Loads can be of two types: front end
and back end. Front-end load, or sale load, is a charge collected when
an investor enters the scheme. Back-end load, or re-purchase, is a
charge collected when the investor leaves the scheme. Schemes that
do not charge a load (where the AMC bears the load during the
launch of the scheme) are called no-load schemes. However, these
no-load schemes can include an exit load if the unit holder leaves
before a stipulated period laid down in the initial offer. This is to
prevent short-term investments and redemptions. Some funds may
charge different loads to investors depending upon the time the
investor has remained. The longer the investor stays, the smaller the
exit load charged. This is known as contingent deferred sales charge
(CDSL). It is a back-end (exit load) fee imposed by certain funds on
shares redeemed within a specific period following their purchase
and is usually assessed on a sliding scale.
(g) Index funds: An index fund is a mutual fund which invests in securities in the index on which it is based, such as BSE Sensex or S&P CNX
Nifty. It invests only in those shares which comprise the market index

Introduction

27

and in exactly the same proportion as the companies/weightage in the


index so that the value of such index funds varies with the market
index. An index fund follows a passive investment strategy, as no effort
is made by the fund manager to identify stocks for investment/disinvestment. The fund manager merely has to track the index on which it
is based. His portfolio will need to be adjusted if there is a revision in
the underlying index. In other words, the fund manager has to buy
stocks which are added to the index and sell stocks which are deleted
from the index. Internationally, index funds are very popular. Around
one-third of professionally run portfolios in the USA are index funds.
Empirical evidence points out that active fund managers have not
been able to perform well. Only 2025 % of actively managed equity
mutual funds out-perform benchmark indices in the long-term. These
active fund managers park 80 % of their money in an index and
undertake active management of the remaining 20 %. Moreover, riskaverse investors such as provident funds and pension funds prefer
investment in passively managed funds such as index funds.
(h) PIE ratio fund: PIE ratio fund is another mutual fund variant that is
offered by Pioneer IT Mutual Fund. The PIE (PriceEarnings) ratio
is the ratio of the price of the stock of a company to its earnings per
share (EPS). The PIE ratio of the index is the weighted average PIE
ratio of all its constituent stocks. The PIE ratio fund invests in equities and debt instruments wherein the proportion of the investment
is determined by the ongoing PIE multiple of the market. Broadly,
around 90 % of the investible funds will be invested in equity if the
Nifty Index PIE ratio is 12 or below. If this ratio exceeds 28, the
investment will be in debt/money markets. Between the two ends of
12 and 28 PIE ratio of the Nifty, the fund will allocate varying proportions of its investible funds to equity and debt. The objective of
this scheme is to provide superior risk-adjusted returns through a
balanced portfolio of equity and debt instruments.
(i) Exchange traded funds: Exchange Traded Funds (ETFs) are a hybrid
of open-ended mutual funds and listed individual stocks. They are
listed on stock exchanges and trade like individual stocks on the
stock exchange. However, trading at the stock exchanges does not
affect their portfolio. ETFs do not sell their shares directly to investors for cash. The shares are offered to investors over the stock

28

The Management of Mutual Funds

exchange. ETFs are basically passively managed funds that track a


particular index such as S&P CNX Nifty. Since they are listed on
stock exchanges, it is possible to buy and sell them throughout the
day, and their price is determined by the demandsupply forces in
the market. In practice, they trade in a small range around the NAV
held by them.

10

Operational Efciency ofMutual Funds

(a) Returns: Mutual funds primarily serve the investors by providing


returns on the investment by the letter. Returns are earned in the
form of (a) appreciation in value of assets made by mutual funds and
(b) dividend or interest received on the investment made. The returns
of mutual funds are dependent on the expenses they incur. SEBI
requires that any expense incurred should be reasonable and regulates
this in order to protect the interests of investors. These expenses can
be a trusteeship fee, management fee, administrative expense fund
accounting fee, custodian fee or initial charges, among others. SEBI
has laid down limits on certain specific expenses and a fixed limit on
overall expenses. An AMC can charge a management fee up to 1.22
% of its weekly average net assets if such assets are up to Rs. 100
crore. This limit is increased up to an additional 1 % if an AMC is
managing a no-load scheme. Further, an AMC cannot charge mutual
fund initial expenses of launching a scheme exceeding 6 %. SEBI still
further desires that overall expenses excluding expense of issue or
redemption shall not exceed 2.5 crore, 2 % on the next Rs. 300 crore
and 1.75 % on balance of the assets. All these limits prescribed by
SEBI are the maximum that a mutual fund can charge, but in practice, when investors are not provided with sufficient returns, they
blame the AMC for charging them the maximum fee. In general, an
AMC will continue to charge the maximum permissible fee without
providing reasonable returns to investors.
(b) Net Asset Value: The NAV of a scheme indicates the intrinsic value
of a unit under the scheme. It is the money which the unit holder can
hope to get if the scheme is wound up and its assets and liabilities are
liquidated.

Introduction

29

NAV per unit=(12)/3


Where 1 = Total market value of investment portfolio, the writtendown value of fixed assets and the cost value of other current assets
2=Current liabilities
3=Number of outstanding units in that scheme
NAV depends upon the accounting policies of the mutual fund.
Accounting practices, especially valuation criteria of the investment portfolio, were broadly spelled out by SEBI in its 1996 regulation. NAV is
relevant in the context of a particular date, and is calculated every day
for open-ended schemes and at least once a week for dividend schemes.
(c) Load: Initial expenses incurred by a scheme are referred to as its load.
If a scheme bears this load it is known as a load scheme. As mentioned earlier, SEBI permits every scheme to write off a maximum of
6 % of its corpus as initial expenses, thus load can be up to 6 % only.
On account of this load (say the whole 6 %), Rs. 100 invested in a
scheme gives Rs. 94 to the fund manager to invest. As a result, mutual
funds will quote below their actual value on listings; whereas in a noload scheme this load is borne by the AMC and is not charged to the
scheme. Thus the entire amount mobilized is invested in the scheme,
this being reflected in higher NAV.Hence no-load schemes are gaining popularity.
(d) Disclosures: Operational efficiency can also be disclosed through
half-yearly results and annual reports. Although distribution of
annual reports is not obligatory, investors can ask for them. Mutual
funds disclose their portfolio to increase transparency in their operations. Investors are given historical per unit statistics for three years.
Facts regarding gross income per unit ratio of expenses to average net
asset by percentage, per unit gross income to average net assets by
percentage, and so on, are also to be disclosed, as required by SEBI.
(e) Voting Rights to Investors: SEBI has made it obligatory for an AMC
to gain prior permission from the investors of the scheme or after
launching the scheme if any of the particular features are to be
amended, such as increasing tenure of the scheme, changing the
nature of the scheme, altering the objectives of the scheme, and so
on. Therefore, investors are granted voting rights when such matters
are put up to meetings of unit holders by an AMC.

30

The Management of Mutual Funds

(f ) Investor Protection: SEBI has ensured safeguard measures for investors, with more and more transparency being required. Unit certificates are to be issued to investors no more than six weeks after the
date of closure of the subscription list. SEBI requests that if some
units are submitted for transfer, such transfer is to be executed within
30 days. Dividend warrants against the scheme are to be dispatched
within 42 days of the declaration of the dividend. SEBI also states
that repurchase proceeds should be dispatched within ten working
days of the date of redemption. Above all, SEBI regularly conducts
inspections of mutual funds to ensure that their operating policies
are not against the interests of investors. SEBI has put a ban on
AMCs issuing new schemes by default.
SEBI will take necessary action if an AMC commits fraudulent
practices.

11

Regulation oftheGlobal Mutual Fund


Industry

In the USA, mutual funds have been labeled as the bank deposits of
the 1990s. Mutual funds have changed the American financial landscape by offering a menu of investment choice, and some companies
such as Fidelity Investments, Vanguard and Merrill Lynch are very popular. The Americans have been pouring over $1 billion every day into
these funds.
Turning now to financial institutions, it is clear that they can
contribute to financial stability by increasing the sophistication of
their risk management systems to match the growing complexity of
domestic and international financial markets, to help ensure that
their actions do not have a negative impact on other participants in
global financial markets. Financial market participants, in turn, have
a responsibility to impose greater market discipline on financial institutions by rewarding those that have better risk management systems
and disclosure practices, and punishing those whose systems are weak.
Achieving both of these objectives will inevitably require meaningful

Introduction

31

disclosure of activities and systems, but we must be careful to balance


the costs and benefits of this. Overburdening banks and other institutions with costly new disclosure requirements can be self-defeating if
it causes transactions to move to less heavily regulated entities that are
less transparent. It is our view that market discipline by hedge fund
counterparts remains a necessary and key component of the response
to the challenges posed by their presence in any market. Greater disclosure by hedge funds themselves may be helpful in this regard, for
example through voluntary codes of conduct or benchmarks for disclosure and risk management practices.
Role and Responsibilities of Regulators
The responsibilities of regulators can be divided into three categories.
First, they need to have in place a regulatory and supervisory framework that ensures the key financial institutions in their jurisdiction
are well managed, with adequate capital buffers and risk management
systems in place. Second, supervisors have a responsibility to ensure
that the information they provide and the information they require
regulated entities to disclose is sufficient for market discipline to be
effective. Supervisors must also ensure that crisis management and
resolution procedures are adequate and well thought through. Third,
national authorities have a responsibility to consider the international
implications of their actions and the spillovers that can arise from
institutions within their jurisdiction. These cross-border spillovers of
national policies are becoming more relevant as the globalization of
flows, institutions and markets continues. This requires all parties to
pay more attention to international cooperation, among the countries
categorized as G7, G8, G20, G30.; the BIS and the FSF; standard setters such as the Basel Committee, IOSCO, IAIS, CPSS; and international institutions such as the IMF, the World Bank and the OECD,
to name just a few. In the area of banking, to take one example of
successful international cooperation, significant efforts have been
devoted to the homehost issue and consistency among supervisors,
minimizing the burden on international banks and ensuring a level
playing field.

32

11.1

The Management of Mutual Funds

Role andResponsibilities intheEuropean


Context

In the European context, the responsibility of supervisors to consider


the international implications of their actions is particularly relevant.
The increasing integration of financial markets in Europe and the growing complexity of cross-border banking mean that supervisory cooperation, crisis management, and resolution procedures in Europe need to
be strengthened further. At the same time, the EU has more instruments
and tools at its disposal, including directives, committees and coordinating mechanisms. Therefore, Europe can be more ambitious in its agenda,
and set the example of good practice for coordination and cooperation
for other countries and regions in the world.
There are three key areas where the European supervisory framework can be strengthened further to help mitigate the risks posed by
greater integration of financial markets in the EU. First is the need
to exploit the maximum potential for cooperation amongst different
national supervisors, to minimize regulatory gaps and to help ensure
a level playing field for financial institutions across countries, while
minimizing the supervisory burden on financial institutions. This can
be done most effectively by further strengthening the existing process,
and by broadening the mandates of national supervisors to consider
the pan-European implications of their actions. The second key area
of reform of the European framework is the need to move to a more
predictable and rule-based system for early remedial action. This will
help to build confidence among member countries that cross-border
crisis management operations will be carried out in the most effective
and least expensive manner. And finally, there is a need to achieve
greater harmonization of deposit insurance schemes, to ensure a more
level playing field and to avoid differences in deposit insurance systems from hindering cross-border problem resolution. These are all
areas that will require much effort and debate to progress, but it is
essential that we should not slip further behind the developments that
are taking place in the markets.

12

Introduction

33

Role andResponsibilities oftheIMF

As an international organization with near universal membership, the


IMF has a responsibility to monitor global financial stability and any
potential threats to it, as well as a duty to advise its member countries on
policies that will minimize the risks to their financial systems and economies that are posed by the forces of globalization. It also has a responsibility to provide technical assistance to members to help them develop the
necessary markets and infrastructure to cope with these challenges, and
to help ensure that they obtain maximum benefit from financial globalization. Finally, IMF lending facilities stand ready to provide resources to
member countries that are facing difficulties in their balance of payments.
The IMF monitors financial systems through regulation. At a regional
level, it provides an analysis of financial conditions facing various groups
of countries or regions, looking at things from the perspective of common trends, challenges and policy responses beyond a strictly national
focus. For example, in the Euro area it has a separate consultation process
in place that looks specifically at European financial and economic issues
from that areas perspective. The object of this advice and cooperation
is to provide countries with the skills and knowledge to develop their
own markets, institutions and policies to meet the challenges posed by
globalization, and to ensure they can benefit from these powerful forces.
In developed economies, protection of depositors in a deregulated environment is typically provided by a system of prudential regulation, but
in developing economies such protection is undermined by the lack of
well-trained supervisors, inadequate disclosure requirements, the cost of
raising capital and the presence of distributional cartels.
(a) Corporate governance: Modern corporate governance originated
after the Watergate scandal in the USA. It was found that control
failures had allowed several major corporations to make illegal political contributions and bribe government officials. The UK also saw
explosive growth in earnings in the 1980s, and ended the decade in a
memorably disastrous manner. These corporate failures arose primar-

34

The Management of Mutual Funds

ily out of poorly managed business practices. In May 1991, the


London Stock Exchange set up a committee under the chairmanship
of Sir Adrian Cadbury to help raise the standards of corporate governance and the level of confidence in financial reporting and auditing.
The committee investigated accountability of the boards of directors
of mutual fund organizations, to shareholders and to the society. It
submitted its report and an associated code of best practices in
December 1992. As this was a pioneering report on corporate governance, it would perhaps be in order to make brief reference to its
recommendations, which are in the nature of guidelines relating to,
among other things, the Board of Directors, reporting and control.
(b) Benchmarking: Benchmarking is a process used in management, particularly strategic management, in which organizations evaluate various aspects of their processes in relation to best practice, usually
within their own sector. This then allows organizations to develop
plans on how to adopt such best practice, usually with the aim of
increasing some aspect of their performance. Benchmarking may be
a one-off event, but is often treated as a continuous process in which
organizations continually seek to challenge their practices. A process
similar to benchmarking is also used in technical product testing and
in land surveying.
(c) Asset Management: Every mutual fund organization must have an
AMC, which plays a vital role in market fluctuations. The assets
accumulated by mutual fund organizations are looked after by
AMCs. These assets have to be deployed in the market to gain returns
and pass them on to the investors. As competition in the industry
stiffens, with around 35 players and more set to hit the market soon,
there is a huge pressure on fund managers to beat the competitors
and their benchmarks.

13

Summary

In this chapter we have discussed the fundamentals of the mutual fund


industry, its origin and historical growth. It also deals with organizational
structure, benefits derived from management of mutual funds and regu-

Introduction

35

latory mechanisms in India. Management of the mutual fund industry


is a vital and complex process. Aspirant managers, investors and other
stakeholders should have a fundamental grasp of four dimensions of the
mutual fund industry: corporate governance, benchmarking, asset management and portfolio management.

2
Review ofLiterature

The fundamental aim of this chapter is to understand the management of


mutual funds in the following areas:
(1) Corporate governance, (2) Benchmarking, (3) Asset management,
(4) Portfolio management, (5) Evaluation models, and (6) Fund managers style.

Corporate Governance

The Investment Company Institute published Global corporate governance issues for mutual funds after conducting a survey of the legal,
regulatory and practical framework of corporate governance.1 This survey allows a comparison of the strengths and weaknesses of corporate
governance systems in different jurisdictions. At the same time, it is
not intended to suggest that a mutual fund should avoid investing in a
market because of the corporate governance practices in that particular
jurisdiction. Hence, the appropriateness of a foreign equity security as a
Investment Company Institute, Global Corporate Governance Issues for Mutual Funds, 2000.

The Author(s) 2017


G.V.S. Sekhar, The Management of Mutual Funds,
DOI10.1007/978-3-319-34000-5_2

37

38

The Management of Mutual Funds

portfolio investment is within the purview of the portfolio manager and


the funds board of directors, taking into consideration the investment
and risk policies of the fund.
The earliest work on evolving a regulatory framework in India for the
mutual fund industry was written by Barua, Varma and Venkiteswaran
(1991).2 They proposed detailed guidelines that could be adopted for
mutual funds operating in the Indian capital markets, as outlined in
Academic Monthly Bulletin on Money, Banking and Finance. Vermas study
(1994) covers the conceptual and regulatory aspects of Indian mutual
funds.3 Seema Vaid (1994) focuses on the regulatory framework, review
of the growth of mutual funds and primary information about mutual
fund schemes.4
Eric Doiters study focuses on corporate governance of mutual funds.5
According to Doiter, there are two essential features of mutual funds
that differentiate them from ordinary corporations. First, mutual funds
are not only separate legal entities; they are also financial products or
services, the means by which fund investors obtain professional investment management from investment advisers. To be sure, investment
management is a fiduciary product, but it is a product nonetheless.
This suggests that fund investors have a composite character: they are
both customers of the funds adviser and shareholders of the fund. For
an ordinary corporation, decision-making authority and oversight of all
facets of its business rest squarely with the board of directors; hence the
corporate director is called upon to exercise wide-ranging business judgment over the corporations business and operations. Doiter states that
The Investment Company Act of 1940 leaves decision-making over a
funds core business and investing in securities down to the funds investment adviser, who has borne both the risk and the expense of organizing
and promoting the fund. Furthermore, mutual funds are fundamentally
S.K. Barua, J.R. Varma and N. Venkiteswaran (1991), A Regulatory Framework for Mutual
Fund, Economic and Political Weekly, Special issue on Review of Management and Industry, Vol.
26, No. 21, May 25, 5559.
3
J.C. Verma (1994), Merchant Banking and Financial Services, Taxmann Publishers Ltd, New
Delhi.
4
Vaid Seema (1994), Mutual Fund Operations in India, Rishi Publications, New Delhi.
5
Eric Doiter (2015), Disentangling Mutual Fund Governance From Corporate Governance, 5
Harvard Business Law Review (Fall).
2

2 Review ofLiterature

39

ifferent from ordinary corporations owing to the right of redemption, a


d
right of the investor to withdraw her capital.
Mohan Rao (1998) studied various issues such as the structure of
mutual funds, investment procedure, accounting and reporting standards,
and so on,6 and states that a lot of structural changes and innovations have
occurred both in the international and national financial system, which
leads to change in housing savings and investment attitude also.
Martin E.Lybecker explores the idea that the Investment Company
Act of 1940 has always required that at least 40 % of the members of
the mutual funds board of directors be independent.7 In July 2004, the
Securities and Exchange Commission amended certain rules in order to
ensure that at least 75 % of the members of a mutual funds board of
directors and the chairman of the board of directors be independent, and
that they engage in certain specific corporate governance practices.
Khurshid etal. (2009) studied the structure of the mutual fund industry
in India.8 They analyzed the competition, its level and trends, between all the
mutual funds for the period March 2003 to March 2009. This study found
that an increasing trend of competition was observed within bank institution, private sector foreign and private sector joint venture mutual funds.
Stephen Erlichmans report revealed vital issues surrounding the different mutual fund governance structures in Canada.9 He explains which
governance models have been embraced by the industry and which have
not. He also states how mutual fund managers believe the governance of
their funds is important to investors.
Ping Yu IIs study of Chinese fund management companies (FMCs) at
firm level also discusses the impact of shareholding structures on board
effectiveness.10 His paper aims to address governance issues of FMCs in
Mohan Rao P (1998), Working of Mutual Fund Organizations in India, Kanishka Publishers,
New Delhi.
7
Martin E. Lybecker (2005), Enhanced Corporate Governance for Mutual Funds: A Flawed
Concept that Deserves Serious Reconsideration, 83 Wash. U.L. Q. 104.
8
Khurshid SMZ, Rohit and Sing GP (2009), Level and trends of competition among the mutual
funds in India, Research Journal of Business Management, Vol. 3. Issue 2, 4767.
9
Stephen Erlichman (2000), Making it Mutual: Aligning the Interests of Investors and Managers:
Recommendations for a Mutual Fund Governance Regime for Canada, Prepared for the Canadian
Securities Administrators. Towards Improved Fund Governance: The Way Forward, Foreword
to the Report, (July 27).
10
Yu, Ping, Corporate Governance of Chinese Fund Management Companies (August 26, 2011).
Available at SSRN: http://ssrn.com/abstract=1917426 or http://dx.doi.org/10.2139/ssrn.1917426.
6

40

The Management of Mutual Funds

China, and his sample size consisted of 288 firm-year observations over
the period from 2006 to 2010. It examines the ways in which governance
mechanisms enhance board effectiveness under the contractual form of
Chinas FMC.
Jingjing Yang, Jing Chi and Martin Young published a study of internal and external corporate governance mechanisms in China.11 They
state that Chinese regulatory bodies have made considerable efforts to
improve the corporate governance of listed firms. This study revealed
that most of the governance instruments that are effective in developed
nations are less effective in China. They attribute this ineffectiveness
to the large stake of the state in listed firms, and strong political connections between listed firms and the government. They argue that the
lack of a truly independent judicial system also causes disturbance in
China, and provide some suggestions for making corporate governance
more effective.

Benchmarking

Jay C. Hartzell, Tobias M. Uhlhofer and Sheridan D. Titman (2010)


studied real estate investment trusts (REITs).12 They claim that very
high growth rates over the past 15 years, the growth in mutual funds
that invest in REITs has been even more dramatic. REIT mutual fund
returns are typically presented relative to the return on a simple value-
weighted REIT index. They asked whether including additional factors
when benchmarking funds returns can improve the explanatory power
of the models and offer more precise estimates of alpha. They investigated
three sets of REIT-based benchmarks, plus an index of returns derived
from non-REIT real estate firms, namely homebuilders and real estate
operating companies.
Jingjing Yang, Jing Chi, and Martin Young (2011), A review of corporate governance in China,
Crawford School of Economics and Government, The Australian National University and
Blackwell Publishing Asia Pty Ltd, doi:10.1111/j.1467-8411.2011.01283.x.
12
Jay C.Hartzell, Tobias M Uhlhofer and Sheridan D.Titman (2010), Alternative Benchmarks for
Evaluating Mutual Fund Performance, Real Estate Economics, V38 1: pp. 121154 DOI:
10.1111/j.1540-6229.2009.00253.x.
11

2 Review ofLiterature

41

A study by Berk A.Sensoy concluded that the performance relative to


the specified benchmark is a significant determinant of an mutual funds
subsequent cash inflows, and also helps furnish suggestions for performance measures that better capture the funds style.13 Sensoy remarks
that these incremental flows appear unlikely to be rational responses to
abnormal returns. The evidence is consistent with the notion that mismatched self-designated benchmarks result from strategic fund behaviour driven by the incentive to improve flows.
Theodore Prince and Frank Bacon analyzed the small cap growth
stock sector of the mutual fund industry against risk-free and market
returns over the ten years 19972006. Results are tested against a toolkit of performance benchmarks to see if expected performance closely
corresponds to the actual results. Development of various performance
benchmarks has allowed investors to quantitatively assess various portfolio alternatives and has established that diversification can reduce systematic risk.14
Mutual funds are a route by which most investors can achieve results
without the need for expensive research and excessive trading costs.
Theodore Princes study indicates that some excess returns have been generated, and that it is impossible to rely upon a single benchmark, even as
a reliable indicator of past performance. A portfolio approach of combining the benchmarks does not seem to work any better. The actively
managed funds examined in this study produced returns that were largely
expected.
Redman et al. examined risk-adjusted returns using Sharpes Index,
Treynors Index and Jensens Alpha for five portfolios of international mutual funds during the periods 19851994, 19851989 and
19901994.15 The benchmarks for comparison were the Vanguard Index
500 mutual fund and a portfolio of funds that invest solely in US stocks.
Berk A.Sensoy (2009), Performance evaluation and self-designated benchmark indexes in the
mutual fund industry, Journal of Financial Economics 92, pp.2539.
14
Theodore Prince and Frank Bacon (2010), Analysing Mutual Fund Performance Against
Established Performance Benchmarks: A Test of Market Efficiency, Research in Business and
Economics Journal, Volume 1February.
15
Arnold L.Redman*, N.S.Gullett* and Herman Manakyan (2000), The Performance of Global
and International Mutual Funds, Journal of Financial and Strategic Decisions Volume 13 Number
1 Spring.
13

42

The Management of Mutual Funds

The results show that during 19851994 the portfolios of international


mutual funds outperformed those based in the USA.During 19851989,
the international fund portfolio outperformed both the US market and
the domestic fund portfolio, while the portfolio of Pacific Rim funds
outperformed both benchmark portfolios.
Grinblatt and Titman (1992) analyzed the performance of 279 mutual
funds over the period of 1975 to 1984 using a benchmark technique, and
found evidence that performance differences between funds persists over
time.16
A study by Alberto Bertoni, Giorgio Bertinetti and Chiara Cesari
reveals that the passive role, implicitly, would place institutional investors in the present market conditions.17 They mention that in reality, savings management is delegated to a small number of professional
operators, as opposed to pure theoretical models in which every person
can act directly on the market thus ensuring unlimited price elasticity.
Institutional investors should be rational and completely informed so
that they can assume an anti-cyclical position on the market. Thus, supply and demand should quickly smooth over emerging price pressures
and avoid price bubbles.
Eun, Kolodny and Resnicks 1991 report used three benchmarks:
the Standard and Poors (S&P) 500 Index, the Morgan Stanley Capital
International World Index and a self-constructed index of US multinational firms.18 The study period was 19771986, and the majority of
international funds outperformed the US market. This study is based on
a sample consisting of 19 US international funds, most funds failed to
out-perform the world index.
Bruce A.Costa, Keith Jakob, Scott J.Niblock and Elisabeth Sinnewes
study investigates equity fund managers and their selection of appropriate self-nominated benchmark indexes for their funds.19 It examines the
Grinblatt and Titman (1992), The persistence of mutual fund performance, Journal of Finance,
Vol. 47, Issue 5, Dec, pp.197784.
17
Alberto Bertoni, Giorgio Bertinetti, and Chiara Cesari (2005), Mutual-Fund Benchmarking and
Market Bubbles: A Behavioural Approach, Transition Studies Review, 12 (1): 36 43
18
Eun, C.S., R.Kolodny and B.G.Resnick (1991), U.S.Based International Mutual Funds: A
Performance Evaluation, The Journal of Portfolio Management 17, Spring, 8894.
19
Bruce A Costa, Keith Jakob, Scott J Niblock and Elisabeth Sinnewe (2015), Benchmarking the
benchmarks: How do risk-adjusted returns of Australian mutual funds and indexes measure up?,
Journal of Asset Management 16, pp.386400 , doi:10.1057/jam.2015.29.
16

2 Review ofLiterature

43

performance of active Australian equity mutual funds vs. nominated


benchmark indexes, namely ASX 200 or ASX 300, from 2008 to 2012.
Alex Frino and David R. Gallaghers study documents the existence
of significant tracking errors for Australian index funds.20 They state that
the magnitude of the difference between index fund returns and index
returns averages between 7.4 and 22.3 basis points per month across
index funds operating for more than 5 years. However, there is little evidence of bias in tracking error, implying that these funds neither systematically outperform nor underperform their benchmark on a before cost
basis. Further analysis suggests that the magnitude of tracking error is
related to fund cash flows, market volatility, transaction costs and index
replication strategies used by the manager.
David E. Allen and Victor Soucik analyzed the performance of
Australian fixed interest managed funds by examining the relative effectiveness of various indices of bond performance. Their study considered
various performance measures: interest rate fluctuations, economic fundamentals, maturity risk, default risk and equity market returns. It also
shows that a correct combination of a bond market variable, a mixture
of interest rate factors and economic factors as well as a proxy for movements in the equity markets yields the optimal benchmark.21

Asset Management

Massimo Massa and Lei Xhang (2008) explored the importance of organizational structure on mutual funds asset management companies.22
Their study found that more hierarchical structures invest less in firms
located closer to them and deliver lower performance. An additional layer
in hierarchical structure reduces the average performance by 24 basis
points per month.
Alex Frino and David R.Gallagher (2002), Is Index Performance Achievable?: An Analysis of
Australian Equity Index Funds, Abacus, Vol. 38(2): pp.200214.
21
David E Allen and Victor Soucik (2003), Some Evidence on the performance benchmarking of
Australian Fixed Interest Funds, Proceedings of Modelling and simulation society of Australia and
New Zealand International Congress on Simulation, pp.122126
22
Massimo Massa and Lee Xhang (2008), The Effects of Organizational Structure on Asset
Management, http://ssrn.com/abstract=1328189.
20

44

The Management of Mutual Funds

Manuel Ammann and Michael Verhofen (2008) examined the impact


of prior performance on the risk-taking behaviour of mutual fund managers. Their sample, taken from U.S. funds, starts in January 2001 and
ends in December 2005. The study found that prior performance in the
first half of the year generally has a positive impact on the choice of the
risk level in the second half of the year. Successful fund managers increase
the volatility, the beta, and assign a higher proportion of their portfolio to
value stocks, small firms, and momentum stocks in comparison to unsuccessful fund managers.23
In his report, David M Smith (2009) discussed the size and market
concentration of the mutual fund industry, the market entry and exit of
mutual funds, the benefits and costs of mutual fund size changes, principal benefits and costs of ownership from fund shareholders perspective and so on. This study is based on data from Morningstar (2009)
about the U.S. mutual funds industry, which was composed of 607 fund
families.24
Lalik (1997) carried out a study of mutual funds and their regulatory
framework in India.25 He also made a critical review of scheme-wise performance and working of the Securities Exchange Board of India. It also
discusses the portfolio management of some Indian managers.

Portfolio Management

Diane Del Guercio and Paula A.Tkacs study (2000) deduces the effectiveness of investors manager selection criteria by estimating the relation
between manager asset flow and performance. 26 They write that pension
fund clients use quantitatively sophisticated measures like Jensens alpha,
Manuel Ammann and Michael Verhofen (2008), The Impact of Prior Performance on the RiskTaking of Mutual Fund Manager. Annals of Finance, Issue 5, pp.6990.
24
David M Smith (2009), The Economics of Mutual Funds, Chapter-3 of forthcoming in John A
Haslem (ed.) A Companion to Mutual Funds, John Wiley Sons, USA.
25
Lalik K Bansal (1997), Mutual Fund- Management and Working, Deep & Deep Publishers,
New Delhi.
26
Diane Del Guercio and Paula A. Tkac (2000), The Determinants of the Flow of Funds of
Managed Portfolios: Mutual Funds versus Pension Funds, Federal Reserve Bank of Atlanta Working
Paper 200021 November.
23

2 Review ofLiterature

45

tracking error, and outperformance of a market benchmark. Pension


clients also punish poorly performing managers by withdrawing assets
under management. In contrast, mutual fund investors use raw return
performance and flock disproportionately to recent winners but do not
withdraw assets from recent losers. Mutual fund manager flow is significantly positively related to Jensens alpha, a seemingly anomalous result
in light of a relatively unsophisticated mutual fund client base. They
provide preliminary evidence, however, that this relation is driven by a
high correlation between Jensens alpha and widely available summary
performance measures, such as Morningstars star rating.
Yonggan Zhao (2005) analyzes an optimal dynamic portfolio and asset
allocation policy for investors who are concerned with the performances
of their portfolios relative to a benchmark.27 As the study observes:
Assuming that asset returns follow a multi-linear factor model similar to the structure of Ross (1976) and that portfolio managers adopt a
mean tracking error analysis similar to Roll (1992), develops a dynamic
model of active portfolio management maximizing risk adjusted excess
return over a well-diversified benchmark. Unlike the case of constant proportional portfolios for the standard utility maximization, our optimal
portfolio policy is state dependent, namely a function of time to investment horizon, the return on the benchmark portfolio, and the return
on the investment portfolio itself. Based on the analysis in this paper,
Zhao defines a dynamic performance measure which relates a portfolios
return to its risk sensitivity. Abnormal returns at each point in time are
quantified as the difference between the realized and the model-fitted
returns. Risk sensitivity is estimated through a dynamic matching that
minimizes the total fitted error of portfolio returns. The study focuses on
the portfolio performances for a sample of U.S. mutual funds with the
data from January 2001 to December 2003. To limit bias in the selection of a benchmark for portfolio evaluation, assume that the benchmark portfolio is the minimum variance portfolio composed of the Dow
Jones Industrial Average index and the Nasdaq 100 index components.
Zhao, Yonggan, A Dynamic Model of Active Portfolio Management and Mutual Fund
Performance Evaluation (March 2005). Available at SSRN: http://ssrn.com/abstract=685683 or
http://dx.doi.org/10.2139/ssrn.685683.
27

46

The Management of Mutual Funds

It was found that majority of the mutual funds have substantially under-
performed the chosen benchmark. His model also implies an interesting
relationship between performance indices and risk sensitivities. For the
three year data, the empirical analysis shows that portfolio performance
indices are related to their estimated risk sensitivities in an open-upward
quadratic curve.
Treynor and Mazuy (1966) identified a test of the ability of investment
managers to anticipate market movements.28 Their study used the investment performance outcomes of 57 investment managers, and found no
statistical evidence that the investment managers of any of the sample
funds had successfully outguessed the market. It also exhibited that the
investment managers had no ability to predict the market as a whole but
could identify underpriced securities.
Bauman and Miller (1995) considered the persistence of pension
fund investment fund performance by type of investment style.29
They utilized a quartile positioning method since they noticed that
speculators give careful consideration to specialists and money
related periodicals venture execution rankings of common subsidizes
and annuity stores. They found that portfolios overseen by venture
guides demonstrated steadier execution, which is measured by quartile rankings over business sector cycles, and that assets overseen by
banks and insurance agencies demonstrated the least consistency. This
study controlled for the impacts of turnover of key chiefs by confining
the example to those assets with the same administrator for the whole
period of study.
Yoon K.Choi (2006) proposed a motivation-perfect portfolio execution
assessment measure.30 In this model, a portfolio manager, who is averse to
take risk,is appointed to deal with an asset, and his portfolio development
and data-gathering exertions are not specifically detectable to financial speTreynor Jack L and Mazuy, Kay K (1966), Can Mutual Funds Outguess the Markets, Harvard
Business Review, 44:, pp.13136.
29
Bauman, W.S., & Miller, R.E. (1995), Portfolio Performance Rankings in Stock Market Cycles.
Financial Analysts Journal, 51, pp.7987.
30
Yoon K Choi, (2006) Relative Portfolio Performance Evaluation and Incentive Structure, Journal
of Business, Vol. 79, No. 2, pp.90321.
28

2 Review ofLiterature

47

cialists in which supervisors are to amplify speculators net returns in administrative remuneration. He considers the impact of authoritative components,
for example the financial matters of scale, on motivating force, and hence on
the performance of the fund.
Eleni Thanou (2008) inspected 17 Greek equity mutual funds and
their risk-adjusted overall performance during the period 1997 to
2005.31 The study assessed the execution of every asset, taking into
account the CAPM execution system, the Treynor and Sharpe Indexes
for the nine year time frame and additionally for three sub-periods
that showed distinctive business sector attributes. It is found that the
market timing ability and the performance of mutual fund is inter
linked.
Mohit Gupta and Agarwal (2009) concentrated on the portfolio
creation and industry grouping of 18 equity-linked savings scheme
(ELSS) plans from April 2006 to April 2007.32 Mutual fund industry
concentration was the variable utilized as a part of order or group creation. This activity was re-hashed every month for the period under
study. Finally, portfolio execution was analyzed alongside file reserve,
the arrangement of three haphazardly picked assets of the earlier
month, and the arrival and danger parameters of ELSS classification
in general.
Sandra Ramirez, Jesus Sierra Jimenez and Jonathan Witmer looked
at the potential vulnerabilities in Canadian long haul open-end mutual
funds.33 It inspects vulnerabilities inside the mutual fund area and then
surveys the vulnerabilities that could leak from the segment into the
Canadian monetary framework. In general, they find that these vulnerabilities are restricted.

Eleni Thanou (2008), Mutual Fund Evaluation During Up and Down Market Conditions: The
Case of Greek Equity Mutual Funds, International Research Journal of Finance and Economics,
Issue 13.
32
Mohit Gupta and Navdeep Aggarwal (2009), Mutual Fund Portfolio Creation using Industry
Concentration, The ICFAI Journal of Management Research, Vol. Viii, No. 3, 2009, pp.720.
33
Sandra Ramirez, Jesus Sierra Jimenez and Jonathan Witmer(2015), Canadian Open-End Mutual
Funds: An Assessment of Potential Vulnerabilities, Bank of Canada, Financial system review, June
pp.4755
31

48

The Management of Mutual Funds

Studies ofEvaluation Models

Friend, Brown, Herman and Vickers (1962) offered the first empirical
analysis of mutual funds performance.34 This study found that average
returns by mutual funds were similar to those delivered by the benchmark
index. It observed that the managed funds were not able to outsmart the
benchmark index, which indicated the presence of market efficiency in
the stock markets.
Sharpe (1964) developed the Sharp Index,35 which is based on capital asset prices, market conditions with the help of risk and return
probabilities.
Sp =

E ( Rp ) Rf

( Rp )

E(Rp): denotes the expected return of the portfolio


Rf: denotes the return on the risk-free asset
(Rp): denotes the standard deviation of portfolio return
Treynor (1965) advocated the use of beta coefficient instead of the
total risk.36
Tp =

E ( Rp ) Rf

E(Rp): denotes the expected return of the portfolio


Rf: denotes the return on the risk-free asset
p: denotes the beta of portfolio return
Treynor and Mazuy (1966) utilized the investment performance of
57 speculation administrators to discover proof of business sector timing
Friend, I., F.E. Brown, E.S. Herman and D. Vickers (1962), A Study of Mutual Funds,
U.S.Government Printing Office, Washington, D.C.
35
Sharpe, William F (1964), Capital Asset Prices: A Theory of Market Equilibrium under conditions of Risk, Journal of Finance, 19: Sept, pp.22542.
36
Treynor Jack L (1965), How to rate management of investment funds?, Harvard Business
Review, Vol. 43, pp.6375.
34

2 Review ofLiterature

49

capacities,37 and found no factual confirmation that the speculation managers had effectively outguessed the business sector. Treynor and Mazuy
built up a reasonable and elite model to gauge investment managers market timing ability. This plan is acquired by including squared additional
arrival in the overabundance return rendition of the capital resource estimating model as given below:

(R

R ft ) = + p ( Rmt R ft ) + yp ( Rmt R ft ) e pt
2+

pt

Where:
Rpt: monthly return on the fund,
Rft: monthly return on 91 days treasury bills,
Rmt: monthly return on market index,
Ept: error term
This model involves running a regression model with excess investment return as a dependent variable and the excess market return and
squared excess market return as independent variables. The value of the
coefficient of squared excess return acts as a measure of market timing
abilities that has been tested for significance by using a t-test. Significant
and positive values provide evidence in support of the investment managers successful market timing abilities.
Michael C.Jensen (1967) finds that these funds are not able to predict
security prices well enough to out-perform a buy and hold policy.38 The
Jensen Model states that given the additional assumption that the capital
market is in equilibrium, all three models yield the following expression
for the expected one period return on any security (or portfolio) j:

E ( R j ) = RF + J E ( Rm ) RF

RF = the one-period risk free interest rate.


Treynor Jack L and Mazuy, Kay K (1966), Can Mutual Funds Outguess the Markets, Harvard
Business Review, 44: 13136.
38
Michel C Jensen (1967), The Performance of Mutual Funds in the Period 194564, Journal of
Finance, Vol. No. 23, No. 2, pp.389416.
37

50

The Management of Mutual Funds

J = cov(j RJ, RM)/2RM = the measure of risk (hereafter called systematic risk), which the asset pricing model implies is crucial in determining
the prices of risky assets.
E(RM) = the expected one-period return on the market portfolio,
which consists of an investment in each asset in the market in proportion
to its fraction of the total value of all assets in the market. It implies that
the expected return on any asset is equal to the risk-free rate plus a risk
premium given by the product of the systematic risk of the asset and the
risk premium on the market portfolio.
Smith and Tito (1969) conducted a study into 38 funds for 19581967
and published results relating to the performance of mutual funds.39
Fama (1972) devised a mechanism for segregation of part of an observed
investment return owing to managers ability to pick up the best securities at a given level of risk, partly through the prediction of general market price movements.40 In Famas decomposition performance evaluation
measure of portfolio, overall performance can be attributed to selectivity
and risk. The performance owing to selectivity is decomposed into net
selectivity and diversification. The difference between actual return and
risk-free return indicates overall performance:

Rp Rf

Wherein
Rp: actual return on the portfolio, which is monthly average return of
fund.
Rf: monthly average return on treasury bills 91 days.
The overall performance further can be bifurcated into performance
owing to selectivity and risk. Thus,

Rp Rf = Rp Rp ( p ) + Rp ( p ) ( Rf )

In other words, overall performance = selectivity + risk


Born Karn Eric (1983), International Banking in the 19th and 20th Centuries, NewYork: St.
Martins Press.
40
Fama Eugene F. (1972), Components of Investment Performance, Journal of Finance, 27:
pp.55167.
39

2 Review ofLiterature

51

Dunn and Theisen (1983) found no evidence that funds performed


within the same quartile over a ten-year period.41 Eun, Kolodny and
Resnick (1991) used various benchmarks such as the S&P 500 Index, the
Morgan Stanley Capital International World Index and a self-constructed
index of US multinational firms.42 Barua and Varma (1993b) examined
the relationship between the net asset value (NAV) and the market price
on Mastershares.43 Droms and Walker (1994) used a cross-sectional/time
series regression methodology.44 Volkman and Wohar (1995) extend this
analysis to examine factors that impact performance persistence, which is
negatively related to size and negatively related to levels of management
fees.45 Elton et al. (1996) examined the predictability of stock mutual
fund performance based on risk-adjusted future performance.46 Jayadev
(1996) evaluates performance based on monthly returns, using risk-
adjusted performance measures that are suggested by Jensen and Treynor
and Sharpe.47 Carhart (1997) showed that expenses and common factors in stock returns such as beta, market capitalization, one-year return
momentum and whether the portfolio is value or growth oriented almost
completely explained short term persistence in risk-adjusted returns.48
Chang etal. (2003) identified a hedging factor in the equilibrium asset
pricing model and used this benchmark to construct a new performance
measure.49 The model adopted by Jow-Ran Chang, Nao-Wei Hung and
Dunn, P.C., &Theisen, R.D (1983), How consistently do active managers win? Journal of
Portfolio Management, 9, pp.4751.
42
Eun, C.S., R.Kolodny and B.G.Resnick (1991), U.S.Based International Mutual Funds: A
Performance Evaluation, The Journal of Portfolio Management 17, Spring, pp.8894.
43
Barua SK and Varma JR (1993b), Speculative Dynamics: The Case of Master shares, Advances
in Financial Planning and Forecasting, Vol.5, Jai Press, Greenwich CT, USA.
44
Droms, W.G. and D.A. Walker, Investment Performance of International Mutual Funds,
Journal of Financial Research 17, Spring 1994, pp.114.
45
Volkman, D.A., &Wohar, M.E. (1995), Determinants of Persistence in Relative Performance
of Mutual Funds, Journal of Financial Research, 18, pp.41530.
46
Elton, Edwin J, Martin J Gruber and Christopher R Blake (1996), Market Timing Ability and
Volatility Implied in investment Newsletters Asset Allocation Recommendations, Journal of
Financial Economics, 42, pp.397421.
47
Jayadeve M (1996), Mutual Fund Performance: An Analysis of Monthly Returns, Finance
India, Vol. X, No. 1, March, pp.7384.
48
Carhart, M. M. (1997), Persistence in Mutual Fund Performance, Journal of Finance, 52,
pp.5782.
49
Jow-Ran Chang, Mao-Wei Hung & Cheng-few Lee (2003), An Intertemporal CAPM approach
to Evaluate Mutual Fund Performance, Review of Quantitative Finance and Accounting, 20,
pp.42533.
41

52

The Management of Mutual Funds

Cheng-Few Lee is based on a competitive equilibrium version of an inter-


temporal asset-pricing model derived in Campbell. The dynamic asset-
pricing model incorporates hedging risk as well as market risk. Formally,
the pricing restrictions on asset imported by the conditional version of
the model are:

Et ri ,t +1 r f ,t +1 = Vi I / 2 + Vim + ( 1) Vih

Where:
Etri, t+1: log return on asset,
r f,t+1:log return on riskless asset,
Vii denotes Vart(ri,t+1), is the agents coefficient of relative risk
aversion,
Vim denotes Covt(ri,t+1, rm,t+1), and

Vih = Covt ( ri,t + 1, ( Et + 1 Et ) , _ j = 1 j rm,t + 1 + j )

the parameter: = 1 exp (c w) and c w is the mean log consumption to wealth ratio.
Alexander (2004) has suggested a new dimension called modified
approach for risk-adjusted performance of mutual funds.50 Martin Eling
(2006) focused on data envelopment analysis (DEA), presented as an
alternative method for hedge fund performance measurement.51 George
Comer (2006) examined the stock market timing ability of two samples
of hybrid mutual funds.52 It was found that bond indices and a bond
timing variable are included in a multifactor analysis of performance
measurement.

Alexander T Obeid (2004), A modified approach for Risk-adjusted performance attribution,


Financial markets and portfolio management, Vol. 18, 2004, No. 3, pp.285305.
51
Martin Eling (2006), Performance Measurement of Hedge Funds using Data Envelopment
Analysis, Financial Markets and Portfolio Management, Vol. 20, pp.442471.
52
George Comer (2006), Hybrid Mutual Funds and Market Timing Performance, Journal of
Business, Vol. 79, No. 2, pp.77197.
50

2 Review ofLiterature

53

Yoon K. Choi (2006) proposed an incentive-compatible portfolio


performance evaluation measure.53 In this model, a risk-averse portfolio
manager is delegated to manage a fund, and his portfolio construction
(and information-gathering) effort is not directly observable to investors. Managers are to maximize investors gross returns and net returns of
managerial compensation. Choi considers the effect of organizational elements such as economics of scale on incentive and thus on performance.
Ramesh Chander (2006) examined the investment performance of
managed portfolios with regard to its sustainability in relation to fund
characteristics, parameter stationarity and benchmark consistency.54
Gajendra Sidana (2007) made an attempt to classify 100 mutual funds
employing cluster analysis and using a whole host of criteria, such as
the one-year return, two-year annualized return, three-year annualized
return, five-year annualized return, alpha and beta.55
Coates and Hubbard (2007) reviewed the structure, performance and
dynamics of the mutual fund industry, and showed that they are consistent with competition.56 It was also found that concentration and barriers
to entry are low, actual entry is common and continuous, pricing exhibits
no dominant long-term trend, and market shares fluctuate significantly.
Cheng-Ru Wu etal. (2008) adopted a modified Delphi method and
the analytical hierarchy process to design an assessment method for
evaluating mutual fund performance.57 The most important criteria of
mutual fund performance should be mutual fund style followed by
market investment environment. This result indicates investors focus
when they evaluate the mutual fund performance.

Yoon K Choi (2006), Relative Portfolio Performance Evaluation and Incentive Structure, Journal
of Business, Vol. 79, No. 2, pp.90321.
54
Ramesh Chander (2006), Informational Efficiency, Parameter Stationarity and Bench Mark
Consistency of Investment Performance, The ICFAI Journal of Applied Finance, March.
55
Gajendra Sidana (2007), Classifying Mutual Funds in India: Some results from clustering,
Indian Journal of Economics and Business, Vol.II.No.2.
56
Coates John C. and Hubbard Glenn R (2007), Competition in the mutual fund industry:
Evidence and implications for policy, Discussion paper No. 592, Aug, Source: http://ssrn.com/
abstract=1005426.
57
Cehng-Ru Wu, Hsin-Yuan Chang & Li-Syuan Wu (2008), A Framework of assessable mutual
fund performance, Journal of Modeling in Management, Vol. 3, No. 2, pp.12539.
53

54

The Management of Mutual Funds

Eleni Thanou (2008) evaluated performance of each fund based on the


CAPM performance methodology, calculating the Treynor and Sharpe
indices for the nine-year period as well as for three sub-periods displaying
different market characteristics.58
Massimo Masa and Lei Zhang (2008) found that more hierarchical
structures invest less in firms located close to them and deliver lower
performance.59 An additional layer in hierarchical structure reduces the
average performance by 24 basis points per month. Manuel Ammann
and Michael Verhofen (2008) found that prior performance in the first
half of the year generally has a positive impact on the choice of the risk
level in the second half of the year.60
Onur, Edwards and Ajay (2008) provide documentation on the risk-
adjusted performance of international mutual funds.61 The evaluation is
based on objective performance measures grounded in modern portfolio
theory.
Qiang Bu and Nelson Lacey (2008) found that mutual fund termination correlates with a variety of fund specific variables as well as
with market variables, such as the S&P 500 index and the short-term
interest rate.62 David M. Smith (2009) discussed the size and market
concentration of the mutual fund industry, the market entry and exit of
mutual funds, the benefits and costs of mutual fund size changes, principal benefits and costs of ownership from fund shareholders perspective,
and so on.63
Bake, Haslem and Smith (2009) showed that the large funds tend to
perform better, which suggests the presence of significant economies of
Eleni Thanou (2008), Mutual Fund Evaluation During Up and Down Market Conditions: The
Case of Greek Equity Mutual Funds, International Research Journal of Finance and Economics,
Issue 13.
59
Massimo Massa and Lee Xhang (2008), The Effects of Organizational Structure on Asset
Management, http://ssrn.com/abstract=1328189.
60
Manuel Ammann and Michael Verhofen (2008), The Impact of Prior Performance on the RiskTaking of Mutual Fund Manager Annals of Finance, Issue 5, pp.6990.
61
Onur Arugaslan, Ed Edwards, Ajay Samant (2008), Risk-adjusted Performance of International
Mutual Funds, Managerial Finance, Vol. 34, No. 1, pp.522.
62
Qiang Bu and Nelson Lacey (2008), On Understanding Mutual fund terminations, Journal of
Economics and Finance, Vol. 33, pp.8099.
63
David M Smith (2009), The Economics of Mutual Funds, Chapter-3 of forthcoming in John A
Haslem (ed.) A Companion to Mutual Funds, John Wiley Sons, USA.
58

2 Review ofLiterature

55

scale.64 The evidence indicates a positive relation between cash holding


and performance.
Khurshid etal. (2009) studied the structure of the mutual fund industry in India and analyzed the state of competition among all mutual
funds in the private and public sectors.65 The levels of competition and
their trends were obtained for the period March 2003 to March 2009.
Sunil Whal and Albert Wang (2010) studied the impact of the entry of
new mutual funds on incumbents by using the overlap in their portfolio
holdings as a measure of competitive intensity.66
Statman Model67 Statman measured mutual funds using the following
equation:
excess standard deviation
eSDAR

and adjusted return

= R f + ( R p R f ) ( Sm / Sp ) Rm

In this formula:
Rf: monthly return on three-month treasury bills,
Rp: monthly return on fund portfolio
Rm: monthly return on the benchmark index,
Sp: standard deviation of portfolio ps return
Sm: standard deviation of return on the benchmark index
This model is used for short-term investment analysis. The performance is compared with its benchmark on a monthly basis.

Baker Kent H, John A. Haslem and David M Smith, Performance and Characteristics of
Actively Managed Institutional Equity Mutual Funds, Electronic copy source: http://ssrn.com/
abstract=1124577.
65
Khurshid SMZ, Rohit and Sing GP (2009), Level and trends of competition among the mutual
funds in India, Research Journal of Business Management, Vol3. Issue 2, pp.47-67.
66
Sunil Wahal and Alber (Yan) Wang (2010), Competition among Mutual Funds, Journal of
Financial Economics, March, source: http://ssrn.com/abstract=1130822.
67
Statman M (2000), Socially responsible Mutual Funds, Financial Analysts Journal, Vol. 56,
pp.3038.
64

56

The Management of Mutual Funds

Elango Model68 The Elango model also compares the performance of


public sector funds vs. private sector mutual funds in India. In order
to examine the trend in performance of NAV during the study period,
growth rate in NAV was computed. The growth rate was computed based
on the following formula:

Growth Rate : Rg = (Yt Y0 / Y0 ) 100

Rg: growth rate registered during the current year


Y1: yield in current year
Y0: yield in previous year
In order to examine whether the past is any indicator of future growth
in the NAV, six regression analyses were carried out. NAV of the base
year was considered as the dependent variable and the current year as the
independent variable.
Equation: Y = A + b X
Dependent variable: Y = NAV of 1999 2000
Independent variable: X = NAV of 2000 2001
In the same way, the second regression equation was computed using
NAVs of 20002001 and 20012002 as dependent and independent
variables.
MM Approach69Leah Modigliani and Franco Modigliani are better
known as M2 in the investment literature. This measure is developed by
adjusting portfolio return. The adjustment is carried out on the uncommitted part of the investment portfolio at the risk-less return, so as to
enable all portfolio holdings to participate in the return generation process. This adjustment is needed to create a level playing field for portfolio

Elango (20003), Which fund yields more returns? A Comparative analysis on the NAV
Performance of Select Public v/s Private/Foreign Open-ended Mutual Fund Schemes in India,
Mutual Funds.
69
Modigliani, Franco and Modigliani, Leah(1997), Risk Adjusted Performance, Journal of
Portfolio Management, pp.4554
68

2 Review ofLiterature

57

risk return and therefore the market return. The effect of this adjustment
is reported below:
M 2 = *Rp Rm

* Rp = ( Rf * (1 Sdm / Sdp ) ) + ( Rp * Sdm / Sdp )

In this formulae:
* Rp = expected return,
Rf = risk-free return,
Sdm = standard deviation of market portfolio
Sdp = standard deviation of managed portfolio

Fund Manager Style

Lixin Huang and Jayant R.Kale present a simple theoretical model to


demonstrate that better mutual fund managers make larger investments
in the important supplier/customer industries related to the main industry.70 They have conducted empirical tests on a large sample of mutual
funds, showing that investment in related industries is positively associated with fund performance, and plays a more significant role in explaining fund performance than investment in the main industry.
Russ Wermers uncovered the fact that shared asset returns consistently
recur over multiyear time spans.71 Buyer and asset director conduct also
assumes an important role in clarifying these trends over time. That is, as
Wermers describes, investors will target the previous years most successful funds. In turn, the managers of these successful funds will channel
the returns into momentum stocks in order to maintain a competitive
edge and out-perform rival funds for up to two years following the initial
Huang, Lixin and Kale, Jayant R., Product Market Linkages, Manager Quality, and Mutual Fund
Performance (September 10, 2012). forthcoming in the Review of Finance. Available at SSRN:
http://ssrn.com/abstract=1429431 or http://dx.doi.org/10.2139/ssrn.1429431.
71
Wermers, Russ, Is Money Really Smart? New Evidence on the Relation Between Mutual Fund
Flows, Manager Behaviour, and Performance Persistence (May 2003). Available at SSRN: http://
ssrn.com/abstract=414420 or http://dx.doi.org/10.2139/ssrn.414420.
70

58

The Management of Mutual Funds

winning return. Overall, at the style-adjusted net returns level, Wermers


shows that, in accordance with earlier studies, there is no persistence.
Ultimately, it is a copycat approach to trading winning asset stock
exchanges to exploit stream related returns that is most effective.
Marcin T.Kacperczyk and Amit Seru findthat:72 a simple model that
relates skills of a fund manager to his reliance on public information
the main implication being that the sensitivity of a managers holdings
to changes in public information decreases in his skill level. They estimate this sensitivity (RPI) as the R^2 of the regression of changes in a
managers portfolio holdings on changes in analysts past recommendations using a large panel of U.S. equity funds for the period 1993 to
2002. Consistent with RPI containing information related to managerial skills, the study find a strong inverse relationship between RPI and
various existing measures of performance. The study results are robust
to different macro-economic variables, various information sets, information spillovers among stocks in the funds portfolio, fund style, fund
size, and fund turnover. In contrast to existing studies, the study also
documents a significant role of manager-specific attributes in explaining
performance.
Keith Cuthbertson, Dirk Nitzsche and Niall OSullivans study critically evaluates the literature on the role of management effects and
fund characteristics in mutual fund performance. First, a brief overview of performance measures is provided. Second, empirical findings
on the predictive power of fund characteristics in explaining future
returns are discussed. Third, the paper reviews the literature on fund
manager behavioural biases and the impact these have on risk taking
and returns.73
Gianni Amisano and Roberto Savona derive a new model within the
Bayesian framework, where managers are assumed to modulate the systematic risk in part by observing how the benchmark returns are related
Kacperczyk, Marcin T. and Seru, Amit, Fund Manager Use of Public Information: New Evidence
on Managerial Skills. Sauder School of Business Working Paper. Available at SSRN: http://ssrn.
com/abstract=623102 or http://dx.doi.org/10.2139/ssrn.623102.
73
Cuthbertson, Keith and Nitzsche, Dirk and OSullivan, Niall, A Review of Behavioural and
Management Effects in Mutual Fund Performance (January 28, 2016).
International Review of Financial Analysis. Available at SSRN: http://ssrn.com/abstract=2723890.
72

2 Review ofLiterature

59

to some set of imperfect predictors, and in part on the basis of their


own information set. In this portfolio allocation process, managers care
about the potential benefits arising from the market timing generated
by benchmark predictors and by private information. In doing this, we
impose a structure on fund returns, betas, and benchmark returns that
help to analyze how managers really use predictors in changing investments over time.74
While a number of surveys on mutual fund performance are available, these have not focused on the role of manager behavioral biases,
manager characteristics and fund management strategic behavior as they
concern fund performance and risk-taking. A number of manager behavioral biases are prevalent in the mutual fund industry and they generally
detract from returns. After a thorough examination of empirical studies,
the following issues may be noted:
(a) Corporate governance of the mutual fund industry across the globe
and a comparative study on India needs attention.
(b) Benchmarking of mutual funds to measure their performance is also
necessary to set targets for fund managers.
(c) Asset management and portfolio management go hand in hand to
achieve better yields in the industry.
(d) Last but not least, fund manager style also influences the performance of any particular fund.

Amisano, Gianni and Savona, Roberto, Imperfect Predictability and Mutual Fund Dynamics:
How Managers Use Predictors in Changing Systematic Risk (March 2008). ECB Working Paper
No. 881. Available at SSRN: http://ssrn.com/abstract=1103484.
74

3
Corporate Governance

Introduction

This chapter focuses on corporate governance issues in the mutual fund


industry. Good corporate governance addresses the principles of the relationship between government and public enterprise and creates the fundamental pillars on which the governing board bases its effectiveness.
The corporate governance of financial institutions in developing economies is important for several reasons. First, financial institutions have
an overwhelmingly dominant position in developing-economic financial systems, and are extremely important engines of economic growth.
Second, as financial markets are usually underdeveloped, banks in developing economies are typically the most important source of finance for
the majority of firms. Third, as well as providing a generally accepted
means of payment, banks in developing countries are usually the main
depository for the economys savings.
In India, regulation of the financial sector has evolved as a product of
planned development where mobilization of savings and the corresponding investments take place in the public sector at predetermined prices.
For instance, when the Unit Trust of India (UTI) went through problems
The Author(s) 2017
G.V.S. Sekhar, The Management of Mutual Funds,
DOI10.1007/978-3-319-34000-5_3

61

62

The Management of Mutual Funds

during the year 1998, the relief packages had to be worked out by the
Government. UTI faced a severe crisis owing to irregularities in management, the non-disclosure policy of US-64 and so on. In the wake of
this, the issue of corporate governance in India was studied in depth and
dealt with by the Confederation of Indian Industries (CII), Associated
Chamber of Commerce and Industry (ASSOCHAM) and the Securities
and Exchange Board of India (SEBI).
Modern corporate governance originated in the aftermath of the
Watergate scandal in the USA. It was found that control failures had
allowed several major corporations to make illegal political contributions
and to bribe government officials. The UK also saw explosive growth
in earnings in the 1980s, ending the decade in a memorably disastrous
manner. These corporate failures arose primarily out of poorly managed
business practices.
It is impossible for an investor, or for a trustee, to closely monitor
a fund manager and ensure that decisions are being made in his best
interest. Since monitoring inputs is not feasible, the only device through
which control can be exercised is the monitoring of performance. An
investor can try to select fund managers who have exhibited the highest
returns in the past, and fire fund managers who fail to perform. A nave
comparison of returns across alternative funds, which is often done in
India, is incorrect when there are differences in the levels of risk adopted
by different funds. Scientific performance evaluation is necessary when
examining this problem. When a manager obtains good returns, it could
often be because he was just lucky, and when a manager gets bad returns,
it could often be because he was unlucky. In this context, we can say that
some of these fund managers are lagging behind in adopting good corporate governance practices.

Measures forGood Corporate


Governance

In developed economies, the protection of depositors in a deregulated


environment is typically provided by a system of prudential regulation,
but in developing economies such protection is undermined by the lack
of well-trained supervisors, inadequate disclosure requirements, the cost

3 Corporate Governance

63

of raising capital and the presence of distributional cartels. In order to


deal with these problems, it was suggested that developing economies
need to adopt the following measures.
First, liberalization policies need to be gradual, and should be dependent upon improvements in prudential regulation. Secondly, developing
economies need to expend resources to enhance the quality of their financial reporting systems. Thirdly, given that capital plays such an important
role in prudential regulatory systems, it may be necessary to improve
investor protection laws, increase financial disclosure and impose fiduciary duties upon directors so that firms can raise the equity capital
required for regulatory purposes.
A further reason why this policy needs to be implemented is the
growing recognition that corporate governance has an important role to
play in assisting supervisory institutions to perform their tasks, allowing supervisors to have a working relationship with the financial institutions management, rather than an adversarial one. It has been suggested
that corporate governance in developing economies is severely affected
by political considerations. Given the trend towards privatization of
government-owned firms in developing economies, there is a need for the
managers of such firms to be granted autonomy and be gradually introduced to the corporate governance practices of the private sector prior to
divestment. Secondly, where there has only been partial divestment and
governments have not relinquished any control to other shareholders, it
may prove very difficult to divest further ownership stakes unless corporate governance is strengthened. Finally, limited entry of foreign firms
may lead to increased competition, which in turn encourages domestic
financial institutes to emulate the corporate governance practices of their
foreign competitors.

Global Corporate Governance Practices

3.1

Australia

Australia operates under a common law system in which courts interpret


legislation in particular circumstances to develop a body of precedent or
common law. There are approximately 1,500 public companies listed on

64

The Management of Mutual Funds

the Australian Stock Exchange (ASX) and other public non-listed corporate entities. Australian listed companies generally have a unitary board
structure with a balance of executive and non-executive directors and a
separate chief executive and chairman. The ASX Corporate Governance
Council is a central reference point that allows companies to understand
stakeholder expectations. In order to promote and restore investor confidence, ASX convened the ASX Corporate Governance Council in August
2002. Its purpose is to develop recommendations which reflect international best practice. The following enactments will govern corporate
governance in Australia.
The Corporate Law Reform Program Act 1999: This introduced a
statutory business judgment rule, re-wrote many of the provisions
about directors duties, revolutionized the rules on take overs and fundraising, and clarified some issues about accounting standards and the
rules generated by accounting standards setting bodies.
The Financial Service Reforms Act 2001: Introduced standardized
regulation for all people and companies that deal in financial products
or that give investment advice.
The Corporate Law Simplifications Act 1995: Amongst many other
reforms, this provided for a new form of company in Australia, the one
person company consisting of one director and one shareholder. The
aim was to provide greater flexibility for small businesses that wished
to incorporate in Australia.

3.2

Canada

Canada was originally inhabited by various Native American people. A


major problem for the country is that large segments of its economy,
notably in manufacturing, petroleum and mining, are controlled by foreign, especially US, interests. This deprives the nation of much of the
profits of its industries and makes the economy vulnerable to development outside Canada.
In Canada, the distribution and sale of mutual fund shares are regulated by provincial securities commissions. An informal council of
securities regulators, the Canadian Securities Administrators (CSA),

3 Corporate Governance

65

coordinates provincial securities regulation through national instruments. The main regulatory framework for open-ended mutual funds
is contained in National Instrument 81102 (NI 81102), which
includes operational requirements regarding custodianship of a funds
assets, the structure of portfolio management fees and redemption of a
funds shares.
Fixed-income mutual funds represent a non-negligible proportion of
Canadian corporate and government fixed-income markets. A sell-off
triggered by outflows could, at least in principle, cause significant price
volatility in these markets. Nevertheless, redemption behavior during
past periods of stress was contained, suggesting that this potential vulnerability is limited.
Although many Canadian fund management firms are affiliated to a
major bank, these banks are unlikely to suffer losses from stress in any of
the management firms funds, since funds and their management firms
are separate legal entities and there is no implicit expectation that a longterm mutual funds price would be supported to maintain a certain value.
Mutual fund managers in Canada run the gamut from very large to
extremely small. Of the 65 mutual fund managers for which we have upto-date statistics:
13 mutual fund managers have in excess of $10 billion in assets under
administration.
17 managers have between $1 billion and $10 billion in assets under
administration.
17 managers have between $100 million and $1 billion in assets under
administration.
18 managers have less than $100 million in assets under
administration.
The largest mutual fund manager in Canada has over $40 billion in
assets under administration, while another large mutual fund manager
offers a line-up of 150 mutual funds. In contrast, many small mutual
fund managers have less than $100 million in assets under administration and manage fewer than ten mutual funds. Needless to say, there
are vast differences in size between the largest and smallest players in
this market.

66

3.3

The Management of Mutual Funds

Denmark

In Denmark, the debate on corporate governance really gathered


momentum following the publication of The Nrby Committees Report
on Corporate Governance in Denmark Recommendations for Corporate
Governance in Denmark in December 2001. This meant that Denmark
joined the large group of countries with a voluntary code of conduct for
what may be regarded as corporate governance.
Before the publication of the Nrby Committees report, the extensive international debate on corporate governance had caused organizations, stock exchanges and others, in a number of countries to adopt
codes of conduct. On the basis of the framework laid down in the
Nrby Committees report, including its recommendation that the
Copenhagen Stock Exchange recommends listed companies to address
in their annual reports for corporate governance, the committee was
also charged with:
Monitoring the development of the requirements generally governing
corporate governance;
Collecting the companies views and experience in relation to their
work on the recommendations;
Assessing the need for revising the Nrby Committees recommendations for corporate governance.

3.4

England, United Kingdom

Corporate governance codes and best practice apply mainly to public


companies admitted to listing by the UK Listing Authority (UKLA),
which is part of the Financial Services Authority (FSA) (listed companies). Corporate governance and directors duties are regulated by case
law, statute, the memorandum and the articles of association. The Listing,
Prospectus and Disclosure Rules are published by the UKLA.The Listing
Rules apply to all companies, and their sponsors that are listed or are
applying to list, on the London Stock Exchange (LSE).

3 Corporate Governance

67

In England, the main corporate entities are the private company and
the public company. A Societas Europaea (SE) can also be registered in
the UK.Most legal requirements for directors apply equally to private
and public companies.
In May 1991, the London Stock Exchange set up a committee under
the chairmanship of Sir Adrian Cadbury to help raise the standards of
corporate governance and the level of confidence in financial reporting
and auditing. The committee investigated the accountability of Boards of
Directors to shareholders and to society. It submitted its report and the
associated code of best practices in December 1992. Being a pioneering
report on corporate governance, it would perhaps be in order to make a
brief reference to its recommendations, which are in the nature of guidelines relating to, among other things, Boards of Directors and reporting
and control.
The Disclosure Rules apply to all companies listed on the LSE.The
Prospectus Rules implement Directive 2003/71/EC on the prospectus to
be published when securities are offered to the public or admitted to trading and set out when a prospectus is required. They apply to any public
offer of transferable securities in the EU or for the admission of these
securities to trading on an EU-regulated market. In the UK this includes
companies listed, or applying to list, on the LSE.The Combined Code
on Corporate Governance applies to listed companies. Its provisions are
not mandatory. However, companies should include a statement in their
annual report indicating that they comply with the Combined Code and
how they do this, or stating that they do not comply and give reasons
for this. AIM companies are also encouraged by institutional investors
to adhere to the Combined Code. The Quoted Companies Alliance has
published a set of corporate governance guidelines for AIM companies.
These are intended as a minimum standard and comprise some simple
principles and recommendations for reporting corporate governance
matters. Guidelines are also issued by bodies that represent institutional
investors. These apply to listed companies and, in some respects, go further than the Combined Code. Although the guidelines are informal,
institutional investors can oppose any corporate actions that contravene
them. In the context of takeovers of public companies, these are the City

68

The Management of Mutual Funds

Code on Takeovers and Mergers and the rules of the Takeover Panel.
The Financial Services and Markets Act 2000 (FSMA) and the FSAs
Code of Market Conduct regulate, for listed companies, the disclosure
and use of confidential and price-sensitive information, and actions that
could create a false market. The FSAs Disclosure Rules which regulate,
for listed companies, public disclosure of confidential and price-sensitive
information concerning the company. The Disclosure Rules also require
that transactions in shares or related securities in the issuer be reported
to directors, persons discharging management responsibilities and connected persons.

3.5

France

France passed two laws, in 2001 and 2003, that were intended to
strengthen the legal position on corporate governance: the NRE law
(on new economic regulations) dated May 15, 2001, and the LSF, dated
August 1, 2003. These laws provide a basic framework, specifically targeting transparency and ethics within companies. The regulations include
the following:
Companies whose shares are traded on a regulated market, and any of
their subsidiaries, are obliged to publish details of executive pay;
Publicity relating to stock options;
The expansion of the approval procedure for related parties
transactions;
The management committee can intervene in the context of a public
offering, and participate in general meetings;
New limitations on the number of executive mandates for limited
companies that can be held by one person;
Publicity of shareholder agreements;
The audit profession can no longer be self-regulated, and audit and
consulting activities must be kept separate;
The chairs of limited companies and firms which are traded on a public market must draw up a report on the conditions governing the
preparation and organization of the work of the Board of Directors
and of internal controls procedures;

3 Corporate Governance

69

Recognition of the right for registered shareholders associations to


bring legal cases;
In the case of a scrip issue, a portion must be set aside for employees.
The French government has chosen to stipulate a legal minimum service for corporate governance. In fact, the preparatory work for these
laws, the Vinot reports in 1995 and 1999 and the Bouton report in
2002, helped to define the principles of corporate governance more precisely and completely, particularly as regards the role and structure of the
Board of Directors. For example, these reports shed a great deal of new
light on sensitive subjects:
Issues relating to the balance of power within the Board of Directors,
such as, for example, the presence of independent directors;
The quality of directors and of the work of the Board: selection of
directors, committees, etc.;
Evaluation of the Board of Directors;
Communications on items not included in the balance sheet, and on
the companys risks.

3.6

Germany

The German corporate governance system is generally regarded as the


standard example of what Franks and Mayer (1994) have called an
insider-controlled and stakeholder-oriented system. Moreover, only a few
years ago it was a consistent system in the sense of being composed of
complementary elements which fit together well. The first objective here
is to show why and in which respects these characterizations were once
appropriate. The German corporate governance system is different from
that of other countries because it foresees the possibility, and even the
necessity, to integrate lenders and employees in the governance of large
corporations. However, the past decade has seen a wave of developments
in the German corporate governance system, which makes it worthwhile
and indeed necessary to investigate whether German corporate governance has recently changed fundamentally.

70

The Management of Mutual Funds

Today, however, it may no longer be appropriate to characterize


German corporate governance in the same way as before. It is worthwhile
and indeed necessary to investigate whether German corporate governance has recently changed in a fundamental way.

3.7

Hungary

Corporate governance legal regulations and codes of conduct have been


imported from the EU extensively to Hungary, which is a small, middleincome economy with a remarkable degree of integration into the world
economy. The countrys savings, however, are not sufficient for catchingup growth; thus, it must fiercely compete for foreign direct investment.
Under these conditions it is obvious that it cannot risk diverging from
with international trends. It has no choice but to follow international
standards in all important fieldsincluding updated corporate governance practices. Being a member of the EU since May 1, 2004, she has
had to adjust in the first place to the European benchmark.
Hungarian civil law is German in legal origin. The analysis of La Porta
etal. (1997) indicates that this suggests the chances are not very good for
investors rights being particularly strongly protected by law. The sample
used by La Porta et al. (1997) and La Porta et al. (1998) contained six
countries whose laws had German origins: Germany, Switzerland, Austria,
Japan, South Korea and Taiwan. The other three groups included were common law origin, French origin and Scandinavian origin. The general result
was that outside investors rights are best protected in common law countries, though German origin countries perform relatively well in protecting creditors rights. Among transition economies, Pistor (2000) identifies
many other German origin countries, such as Croatia, the Czech Republic,
Estonia, Latvia, Lithuania, Poland, the Slovak Republic and Slovenia.

3.8

New Zealand

New Zealands corporate governance system is relatively unusual by international standards in a number of respects. First, unlike the financial systems of many countries, in New Zealand the banks form a very dominant
part of the financial sector. Registered banks, of which there are currently

3 Corporate Governance

71

18, represent the lions share of the total financial system; and of the 18
registered banks, only about five banks could be regarded as systemically
important, together holding more than 80 % of total registered bank assets.
The New Zealand methodology is a compelling method for advancing
a sound money-related framework. It diminishes the ethical dangers connected with customary saving money supervision, and reinforces the viability of business sector discipline on banks. New Zealands way of dealing
with money-related division control creates a domain that is helpful for
strong business sector disciplines. This is accomplished through various
measures,including the advancement of a generally open, contestable
saving money segment, and an aggressively unbiased way of dealing with
controlempowering banks and non-banks to contend on to a great
extent approach termsand the non-attendance of store protection.
Whats more, the Reserve Banks way of dealing with reacting to a bank
disappointment focuses on the significance of having the capacity to deal
with it in ways that keep away from the requirement for an administration financed safeguard, and serves as a guarantee for shareholders, subordinated creditors and senior creditors, including contributors.

3.9

Scotland

The Scottish parliament has administrative authority for all other areas
relating to Scotland and has limited power to vary income tax, but has
never exercised this power. Scottish parliament can defer devolved matters
back to Westminster to be considered as part of UK legislation by passing a
legislative consent motion if UK-wide legislation is considered to be more
appropriate. The programs of legislation enacted by the Scottish parliament
have diverged in the provision of public services from those of the UK.

Regulation oftheInvestment Fund


Industry inAsia

Regulatory authorities in Asia have made a serious effort to promulgate


legislation and regulation to support a properly structured mutual fund
industryone that will strengthen efficiency in financial intermedia-

72

The Management of Mutual Funds

tion. All countries in our study have re-organized their regulatory systems covering the fund management industry in the form of independent
and centralized systems, incorporating different regulatory regimes and
functions that had previously been spread over various agencies such as
ministries of finance and central banks. The Asian countries have also
completed enacting laws that have significantly liberalized the fund management industry and revised establishment criteria. As noted below, in
Indonesia regulation of the mutual fund industry has not yet been centralized, and there is no unitary regulatory framework. The Central Bank,
Ministry of Finance and Capital Market Supervisory Agency will share
the responsibility for regulation.

4.1

Indonesia

Indonesia is in the process of centralizing and has established a committee for the integration of regulatory units. This transition is in line with
the regulatory trend in more mature financial marketsfor example, the
UKs Financial Services and Markets Act of 2000 (FSMA) and Japans Act
of Investment Trust and Investment Corporation, which were promulgated based on the principle of regulation by function.

4.2

Bhutan

Bhutan is one of the most disengaged countries on the planet. Outside


impacts and tourism are intensely managed by the administration to protect the nations traditional society and national personality. In spite of the
fact that Bhutans economy is one of the worlds smallest, it has developed
quickly with around 8 pennys return on investment for every penny in
2005 and 15 pennys retrun on investment for every penny in 2006. This
took place for the most part because of the tremendous Tala hydroelectricity venture. A landscape that fluctuates from bumpy to roughly rugged has made the creation of streets and other infrastructure troublesome
and costly. This, and an absence of access to the ocean, has led the rest
of the world to conclude that Bhutan has not possessed the inclination
to fully exploit its produce. The new phase in the countrys economy is

3 Corporate Governance

73

still at an incipient stage. The housing industry remains its biggest sector,
but increasingly more commercial ventures are being undertaken. The
Indo-Bhutan Friendship arrangement expresses the hope that the administration of the Kingdom of Bhutan and the legislature of the Republic of
India might coordinate with each other in order to enhance their national
advantages. The Indo-Bhutan kinship bargain of 2007 reinforces Bhutans
status as a free and sovereign country. However, corporate administration
in Bhutan is still at the stage of being created.
The Royal Securities Exchange of Bhutan (RSEB) was consolidated
in 1993 under the Companies Act, 1982 and the Financial Institutions
Act, 1992. Its underlying Nu2 million approved capital was given by the
Bank of Bhutan, the Bhutan National Bank, the Bhutan Development
Finance Corporation and the Royal Insurance Corporation of Bhutan
the four organizations with business firms that were then authorized to
serve as merchant specialists. The RSEB is presently claimed by these
four merchant representative individuals. Initial public offerings (IPOs)
of shares must take place through the RSEB. By the end of 2011, 22
organizations had been recorded on the RSEB.The trade had minimal
auxiliary exchanging. The RSEB additionally has essential offerings of a
great deal of government andRoyal Monetary Authority (RMA) obligation, and it had four corporate securities toward the end of 2011.
The government established the National Pension and Provident Fund
(NPPF) in March 2000 as an autonomous agency responsible for administering the pension and provident fund plan for the civil service, corporate employees and the armed forces.1 With assets of more than Nu12
billion in 2011, the NPPF is the largest institutional investor in Bhutan
and has fiduciary responsibility for managing its investments. Because
the capital market was underdeveloped and the availability of investment
instruments was limited, the RMA mandated the NPPF at the funds
inception in 2001 to undertake limited lending activities. Following
adoption of the Financial Services Act in June 2011, however, the RMA
directed the NPPF to end lending activities from June 2014. This necessitates a major re-orientation of NPPFs business plan and an assessment
of options for a re-structuring.
1

http://www.adb.org/sites/default/files/project-document/75150/46300-001-bhu-tar.pdf.

74

The Management of Mutual Funds

4.3

Korea

In Korea, the Indirect Investment Asset Management Business Act was


established in October 2003 and came into force in January 2004 for
the control of the benefit administration industry. Until this point, the
authoritative sort stores had been managed by the Securities Investment
Trust Business Act, corporate sort reserves by the Securities Investment
Company Act, unspecified cash trusts by the Trust Business Act and
variable protection items by the Insurance Business Act. The 2003 Act
depended on the Securities Investment Trust Business Act and provides
that the full scope of advantage administration exercises be controlled
similarly by binding together all benefit administration related directions.
The new Act enlarged the extent of investible advantages for incorporate
trade exchanged subsidiaries, Over-the-Counter (OTC) subordinates,
land, genuine resources and comparable items. The Act additionally
settled directions covering administration of asset resources. Investment
by any one indirect investment vehicle in investment securities of the
same issuer cannot exceed 10 % of total assets, and an asset management
company cannot invest in more than 20 % of the outstanding shares of a
company, comprising the cumulative exposure of all of its direct and its
indirect investment vehicles. Furthermore, asset management companies
are required to publish investment prospectuses and quarterly performance reports, and must report to the FSC on a monthly basis.2

4.4

Malaysia

In Malaysia, the regulation of the investment fund industry was centralized with the establishment of the Securities Commission (SC)
in March 1993, coupled with the implementation of the Securities
Commission Regulations in 1996. The Securities Commission adopted
a full disclosure-based regulatory framework in May 2003, and accelerated the assessment of applications for the issuance of unit trusts and
prospectus registration, and reinforced disclosure and reporting requirements. The regulations also allow third-party distribution and the licens2

See http://www.amak.or.kr/Eng/Investment/InDisclosure.aspx for additional information. On


fund taxation in Korea, see http://www.amak.or.kr/Eng/Investment/InTaxation.aspx.

3 Corporate Governance

75

ing of tied agents involved in the distribution of unit trusts, and allowed
stock brokerage companies to manage unit trusts. These changes provided substantial impetus to growth and development in the industry.
The Malaysian Capital Market Master Plan has served as a guideline for
the financial sector since 2010, and encourages the continued liberalization of mutual funds that began in 1997. The Federation of Malaysian
Unit Trust Managers seeks to develop the industry by improving the
regulatory and legal environment for unit trusts, with a view to formulating business policies beneficial to the industry, providing information
and assistance to its members, and promoting awareness of the industry
among the general public.

4.5

Philippines

Mutual fund activities in the Philippines are regulated by the Securities


and Exchange Commission (SEC) under the Investment Company Act.
Investment companies are required to have a minimum subscribed and
paid-up capital of P 50 million, and to submit their investment objectives
and plans to the SEC for approval.

4.6

Singapore

The Monetary Authority of Singapore (MAS) has been responsible for


regulation of mutual funds since 1999. MAS introduced the Business
Trusts Act to regulate the trust business, and this came into effect in
January 2005 having been passed by Parliament in September 2004.

4.7

UAE

The United Arab Emirates (UAE) is a Middle Eastern federation of


seven states which are termed as emirates: Abu Dhabi, Ajman, Dubai,
Fujairah, Ras Al-Khaiman, Sharjah and Ummal-Quwain. UAE is rich
in oil and expects recent economic diversification to draw more financial and banking firms. The GDP per capita is currently third in the
world, at $168 billion in 2006. The presidency and premiership of

76

The Management of Mutual Funds

UAE are hereditary for the Al Nahyan clan of Abu Dhabi and the Al
Makotum clan of Dubai respectively. The supreme council consists of
the rulers of the seven emirates. Petroleum and natural gas exports till
play an important role in the economy, especially in Abu Dhabi. A massive construction boom, an expanding manufacturing base and a thriving service sector are helping the UAE.At present $350 billion worth
of active construction projects are being undertaken by UAE.In third
place is the tourism industry.

4.8

China

In China, the Board of Directors of Fund Management Companies


(FMC) is commanded to secure the premiums of financial specialists.
It could be contended that board adequacy under the legally binding
structure is a more essential issue than it is under corporate structure
or in traditional recorded organizations, since asset financial specialists
are not FMC shareholders and there is an absence of asset speculator
representation in the administration of FMC. It was recommended
that the conrolling canbe done by a board viz., a board with more
noteworthy freedom, a board with a female CEO or board seat, and
the nearness of compensation advisory group all upgrade board viability, while the level of shareholder fixation and expanding shareholding
from state-claimed money related organizations has no administration
sway.
The mutual-fund industry in China was largely unregulated until 1997,
when the Investment Fund Law was passed. The Securities Investment
Fund Law superseded that legislation in June 2004 and set requirements
for the establishment and trading of the funds. The main requirements
for establishing a fund are that it maintains a minimum registered capital
of Rmb 100 million and that the major shareholder in the fund must be
a company specialized in the securities business, with no record of regulatory infringements over the previous three years and with capital of at
least Rmb 300 million.
Reserves must assign an overseer as a business bank affirmed by the
China Securities Regulatory Commission (CSRC), whose undertakings
incorporate protection of asset resources, building up records, keeping up

3 Corporate Governance

77

records and taking care of settlement and conveyance. In February 2005,


the Peoples Bank of China, China Banking Regulatory Commission and
CSRC together issued the Administrative Rules for Pilot Incorporation
of Fund Management Companies by Commercial Banks. These tenets
try to guarantee isolation of business banks keeping money business
and their asset administration business. The China Banking Regulatory
Commission administers the benefit administration organizations, the
worldwide trust and venture organizations, and the banks considering
exercises. The CSRC administers the common assets and furthermore the
developing offer speculation exercises undertaken by the national benefits
reserve.

4.9

Thailand

The Securities and Exchange Commission (SEC) regulates the unit trust
industry in Thailand. Since August 2003 all financial institutions have
been allowed to apply for mutual-fund management licenses, although
only through separate entities in which they own at least 75 %. In
February 2005 the SEC and the Association of Investment Management
Companies (AIMC) proposed additional risk disclosures for mutual
funds operating in Thailand. Principal regulatory restrictions in the fund
management industry in the region can be summarized as entry criteria
such as minimum capital requirements, minimum number of investors
to establish the fund, number of years of experience as a fund manager
and limits on asset allocation. However, the specifics of the regulations
vary to a great extent among countries. For example, the minimum capital requirement for an asset management company is US $12 million in
China, US $1 million in Korea.

4.10

India

In India, regulation of the financial sector has evolved as a product of


planned development where mobilization of savings and the corresponding investments take place through the public sector at predetermined
prices. The issue of corporate governance was studied in depth and dealt
with by the Confederation CII, ASSOCHAM and SEBI.

78

The Management of Mutual Funds

SEBI, the regulator, was worried by the stunning information provided


by Value Research (an independent mutual fund research company) that as
many as 27 mutual fund schemes had just one investor holding anywhere
between 23 and 90 % of the corpus. Of these, eight funds have single investors holding 80 to 100 %. All top mutual funds including ING, Prudential
ICICI, JM Mutual Fund, Cholamandalam and Tata TD Waterhouse had
such single investor schemes. In effect, this investorprobably a companyhad the benefit of a portfolio management scheme masquerading
as a mutual fund, with all the tax benefits of the latter. More importantly,
unlike IPOs, where the listing rules mandate a minimum number of investors, SEBI has no equivalent rules for mutual funds. The revelations only
expose more of the regulatory lethargy that had gripped SEBI.
But mutual fund CEOs think that this may not be the only example of
mutual funds using their ingenuity and expertise to cater to the corporate
sector and individual investors. Many of these schemes also invest in a single
security that matures at a particular date, and most single investor schemes
are likely to be in this category. Such schemes are a negation of the very
concept of mutual funds, where expert investment managers are supposed to
hedge risk by investing in a basket of securities. Between schemes that have
just one investor and inter-corporate deposits in the guise of mutual funds
walking away with tax advantages, it is clear that SEBIs rules need a serious
re-think. Sources say that SEBI may soon initiate a complete act of mutual
fund regulations and also examine why mutual funds are becoming a tool
for companies and individual investors (huge investors), rather than for retail
investors. It may also try to figure out why retail investors are uninterested in
mutual funds and examine the persistent charges that many fund managers
tend to front run their investment decisions despite compliance rules.

Role ofSecurities Exchange Board


ofIndia (SEBI)3

SEBI announced guidelines for the money market operations of mutual


funds in May 1994 and approved regulations for mutual funds in
December 1996. The revised guidelines of SEBI strongly emphasize
3

Complete information relating to various circulars, notifications, guidelines with reference


tomutual funds issued by SEBI can beobtained fromwww.sebi.gov.in.

3 Corporate Governance

79

the governance of mutual funds in the interests of investors, increased


responsibilities of the trustees and an enhancement of the level of investors protection. Reform measures were initiated in India in 1993 with
a three-pronged objective: to protect investors so as to generate confidence necessary for mobilizing resources, generating competition so as to
improve efficiency, and promoting innovations.4
SEBI has also provided regulations for trustees and trust companies.
It has specified rules for trust deeds, custodians of mutual funds, investment limitations and winding up procedures. SEBI has the right to call
for any information regarding the operations of the mutual funds, any of
its schemes from the mutual fund, asset management company (AMC),
custodian, sponsor or any other person associated with the mutual fund.
All mutual funds will be expected to submit to SEBI the texts of the marketing literature and advertisements issued to investors.
SEBI can, after due investigation, impose penalties on mutual funds
for violating the guidelines as may be necessary. However, in the case of
penalties of suspension or deauthorization of mutual fund entities, prior
concurrence of Reserve Bank of India (RBI) and the government shall be
taken. Appeals against decisions made by SEBI lie with the Department
of Economic Affairs, Ministry of Finance.
SEBI has recently allowed mutual funds to invest 100 % of funds
raised in the money market up to six months and thereafter later 30 %
of funds for six months to one year and only 25 % in the money market
and again 100 % of funds in the money market, six months prior to
repayment to investors.

5.1

Securities Lending by Mutual Funds

Mutual funds were allowed to participate in securities lending subject to


certain disclosures and reporting requirements. The guidelines issued lay
down the disclosure requirements in the offer documents, which include
intention to lend the securities belonging to the scheme, the exposure
limit regarding securities lending both for the scheme as well as for a single intermediary and the risks associated with stock-lending transactions.
4

Vyuptakesh Sharan, Reforming Mutual Funds in India, The Indian Journal of Commerce, Vol.
No. 60 No. 4, OctoberDecember, 2007 pp.7787.

80

The Management of Mutual Funds

The specifications regarding the valuation of the collateral have been prescribed in the guidelines to minimize the risk involved in securities lending transactions. To ensure adequate checks and balances regarding the
securities lending transactions, the requirement of reporting to trustees
and SEBI has been stipulated.

5.2

Participation by Mutual Funds inDerivative


Trading

The Report on the Committee of Derivatives recommended the participation by mutual funds in derivative trading for the purposes of hedging and portfolio balancing. The Securities and Exchange Board of India
(Mutual Funds) Regulations 1996 were amended to allow mutual funds
to participate in derivatives trading whenever this is introduced.

SEBI Guidelines During 20072008

Mutual funds cannot invest more than 10 % of the total net assets of a
scheme in the short-term deposits of a single bank, the Securities and
Exchange Board of India said on April 16, 2007.5 Announcing guidelines
for parking of funds in short-term deposits of scheduled commercial banks
(SCBs) by mutual funds, the regulator said that investment cap would also
take into account the deposit schemes of the banks subsidiaries. The SEBI
has also defined short term for funds investment purposes as a period
not exceeding 91 days. Besides, the parking of funds in short-term deposits of all SCBs has been capped at 15 % of the net asset value (NAV) of a
scheme, which can be raised to 20 % with prior approval of the trustees.
The parking of funds in short-term deposits of associate and sponsor SCBs
together should not exceed 20 % of total deployment by the MF in shortterm deposits, it added. The SEBI said that these guidelines are aimed at
ensuring that funds collected in a scheme are invested as per the investment
objective stated in the offer document of a mutual fund scheme.
5

The Hindu and Business Line, 17th April 2007.

3 Corporate Governance

81

The new guidelines are applicable to all fresh investments whether in


a new scheme or an existing one. In cases of an existing scheme, where
the scheme has already parked funds in short-term deposits, the asset
management company is given three-months to conform with the new
guidelines. The SEBI also asks the trustees of a fund to ensure that no
funds are parked by a scheme in the short term deposit of a bank that has
invested in that particular scheme. The SEBI guidelines say that AMCs
shall not be permitted to charge any investment and advisory fees for
parking of funds in short-term deposits of banks in the case of liquid and
debt-oriented schemes. It also asks trustees to disclose details of all such
funds parked in short-term deposits in half-yearly portfolio statements
under a separate heading, and that AMCs should also certify the same in
their bi-monthly compliance test report. All the short-term deposits by
mutual funds should be held in the name of the scheme concerned only.

SEBI Guidelines, 2009

The first major salvo of SEBI was to scrap the entry load with effect from
August 1, 2009. Entry loads are upfront payments from the investors
pocket along with his investment in a specific mutual fund scheme. By
scrapping this, SEBI allowed investors to decide the commission paid to
distributors. Besides this, voluntary service from distributors and advisors to sell mutual funds has virtually stopped. Investor education is the
joint responsibility of all fund houses, the Association of Mutual Funds
of India (AMFI) and the regulator, and in fact the government and every
entity that believes mutual fund industry growth is an important requirement for the overall health of an investment group.
SEBI also announced exit load rules, which bar mutual funds from
having different exit load structures for various classes of investors. This
measure is aimed at helping small investors. SEBI also introduced norms
for valuation of debt securities and the simplification of offer documents
and the Key Information Memorandum, making sure they are all investor friendly.6
6

Sridhar AN, Indian Mutual Fund Industry Winds of Change, Chartered Financial Analyst, Jan
2010.

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The Management of Mutual Funds

SEBI 2014:
NEW CORPORATE GOVERNANCE NORMS; MUTUAL FUND
POLICY, 2014: SEBIs new norms that were effective from October
1, 2014 move in the right direction and go a long way towards changing the corporate governance paradigm. The norms empower minority shareholders to be more informed and to easily exercise their votes,
said Shriram Subramanian, founder and managing director of In
Govern Research Services, a proxy advisory firm.
A person cant be an independent director in more than seven companies and cannot accept stock options from them, according to new
rules issued by SEBI. The SEBI board also made it mandatory for
companies to disclose CEO compensation.
The new rules restrict the tenure of independent directors to two fiveyear terms. Directors nominated by the companys promoter cannot
be classified as independent directors.
Companies have to disclose remuneration policies of CEOs and executive directors, related-party transactions and appointment and resignations of independent directors.
These rules are aimed at aligning corporate governance norms to best
global practices and to the new Companies Act of 2013, said SEBI
chairman UK Sinha. We have decided that there will be a compensation committee that has to be headed by an independent director. The
committee will first [have to] put in place a remuneration policy and
it will be fixing the remuneration of key managerial persons.
SEBI stated that if a person is a full-time director in a listed company,
then he can only be on three boards. If somebody has already been
independent director for more than five years, then he can get only
one extra term of five years, Sinha said. The regulator has also made it
mandatory for companies to have an orderly succession plan for
appointments to the board and senior management, a whistle-blowing
policy and to appoint at least one woman director on its board, besides
empowering minority shareholders to approve related-party
transactions.
Some of these changes may attract criticism. Recently, HDFC chairman Deepak Parekh criticized any move to cap the number of board

3 Corporate Governance

83

memberships for independent directors, saying there was a paucity of


directors.
The SEBI board also announced higher net worth requirements for
asset management companies. The minimum capital requirement for
an asset management company has been increased from Rs. 10 crore
to Rs. 50 crore.
The recommended tax incentives for mutual fund schemes are:
(a) A long-term product such as Mutual Fund Linked Retirement Plan
(MFLRP) with additional tax incentive of Rs. 50,000 under 80C of
Income Tax Act may be introduced.
Alternatively, the limit of section 80C of the Income Tax Act,
1961, may be enhanced from Rs. 1 lakh to Rs. 2 lakh to make mutual
fund products (ELSS and MFLRP) as priority for investors among
the different investment avenues. RGESS may also be brought under
this enhanced limit.
Similar to merger/consolidation of companies, the merger/consolidation of equity mutual funds schemes also may not be treated as
transfer, and therefore may be exempted from capital gain taxation.
The SEBI board also decided to ensure that mutual funds achieve a
reasonable size and play an important role in financial inclusion, while
enhancing transparency. Here are the objectives decided by SEBI for this:
(a) Capital Adequacy: i.e. minimum net worth of the AMC be increased
to Rs. 50 crore.
(b) The concept of seed capital to be introduced: i.e. 1 % of the amount
raised (subject to a maximum of Rs. 50 lakh) to be invested by an
AMC in all the open ended schemes during its life time.
(c) Employees Provident Fund Organization (EPFOs) be allowed to
invest up to 15 % of their corpus in equities and mutual funds.
Further, the members of EPFOs who are earning more than Rs.
6,500 per month be offered an option for a part of their corpus to be
invested in a mutual fund product of their choice.
(d) Presently, Navratna and Miniratna Central Public Sector Enterprises
(CPSEs) are permitted to invest in public sector mutual funds regu-

84

(e)

(f )

(g)

(h)

The Management of Mutual Funds

lated by SEBI.It has been recommended that all CPSEs be allowed


to choose from any of the SEBI-registered mutual funds for investing
their surplus funds.
In order to enhance transparency and improve the quality of disclosures, it has been decided that assets under management (AUM)
from different categories of schemes such as equity schemes, debt
schemes, AUM from B-15 cities, contributions of a sponsor and its
associates in AUM of schemes of their mutual fund, AUM garnered
through sponsor group/non-sponsor group distributors and so on are
to be disclosed on a monthly basis on the respective website of AMCs
and on a consolidated basis on the AMFI website.
In order to improve transparency as well as to encourage Mutual Funds
to diligently participate in corporate governance of the investee companies and exercise their voting rights in the best interest of the unit
holders, voting data along with the rationale for their decision be disclosed on a quarterly basis on their website. This is to be certified by the
auditor annually and reviewed by the board of AMC and the trustees.
Towards the goal of financial inclusion, a gradual approach is to be
taken, such that initially the banked population of the country may
be targeted with respect to mutual funds investment. SEBI will work
towards the introduction of the basics of capital markets and financial planning as core curriculum in schools and colleges. Printed literature on mutual funds in regional languages is also to be mandatorily
made available by mutual funds. Investor awareness campaigns, in
print and electronic media and in regional languages to be
introduced.
In order to develop and enhance the distribution network PSU banks
may be encouraged to distribute schemes of all mutual funds. The
online investment facility needs to be enhanced to encourage
internet-savvy users to invest in mutual funds. Moreover, mutual
fund products need to be distributed directly to the burgeoning
number of mobile-only internet users.

The SEBI board also cleared new KYC registration agency (KRA) regulations that would make it easier for the investors to comply with know
your client (KYC) requirements across various segments of the capital
markets.

3 Corporate Governance

85

The approval by SEBI board to the new corporate governance norms follows months-long discussion among various stakeholders on draft regulations released last year.
The new norms seek to check excessive salaries paid to top executives of
listed companies by requiring them to justify such payments, as also all
related party transactions with entities linked to promoters and directors.

The companies would also need to adopt a whistle-blower policy for


employees, while the number of directorships a person can hold on company boards would be capped, among various other measures to safeguard the interest of minority shareholders.
The new norms provide for greater oversight by minority shareholders and independent directors and check any unjustifiable payments to
related parties.
They also seek to bring in a greater alignment of CEO salaries with
the performance and goals of the company, while requiring disclosure of
ratios of remuneration paid to each of their directors and their median
staff salary.
Similar provisions have been made in the new Companies Act.
SEBI had earlier said that on average, the remuneration paid to CEOs
in certain Indian companies are far higher than the remuneration received
by their foreign counterparts and there is no justification available to that
effect.
Through these measures, SEBI is seeking to adopt better global practices without increasing the cost of compliances, so that confidence of the
investors is brought back to the market.

Role ofAssociation ofMutual Funds


inIndia (AMFI)

AMFI has also played a supportive role in formulating guidelines and


perfecting them in the interests of investors and mutual funds. Based
on the working of the mutual fund regulations over the last ten years,
there are certain areas such as investors education and protection which
require re-examination. The board of trustees of a mutual fund has several responsibilities. It has to form the AMC to manage the funds and

86

The Management of Mutual Funds

also appoint and enter into an agreement with the custodian for the custody of assets. This is yet another area related to investment.
AMFI first began with creating awareness, followed by education, then
certification with the help of National Stock Exchanges Capital Market
Certification Module (NCFM) as well as by conducting manual tests in
association with the Indian Institute of Capital Markets and the Institute
of Banking Personnel Selection.

AMFI Guidelines andNorms


forIntermediaries (AGNI)

AMFI introduced the process to register the intermediaries who have passed
the certification test as AMFI Registered Mutual Fund Advisors (ARMFA),
thus laying the foundation for an organized industry and allotting each intermediary a unique code-AMFI Registration Number along with an identity
card. SEBI, recognizing the importance of this initiative, has made registration with AMFI after passing the AMFI Certification Test compulsory
for intermediaries. Thus all AMFI Certified Intermediaries engaged in the
marketing and selling of mutual fund schemes are required to be registered
with AMFI.In order to promote best practices and ethical standards in the
business of sale of mutual fund schemes, AMFI has formulated broad guidelines and norms including a code of ethics for the intermediaries, which will
be applicable to ARMFA.Besides this, AMFI authorized M/s. Computer
Age Management Services Pvt Ltd (CAMS) to act as processing agent on its
behalf for the purpose of AMFI Registration Number (ARN).
Corporate Governance Policy on Exercising Voting Rights
BackgroundUnit Trust of India Mutual Fund: A Case Study7
UTI Asset Management Company Ltd (UTI AMC), the Investment
Manager of UTI Mutual Fund (UTI MF), in its fiduciary capacity acts in
the best interests of its unit holders which, inter alia, includes exercising
voting rights attached to the equity shares in which mutual fund schemes
invest.
7

http://www.utimf.com/aboutus/Documents/Corp_Govern_Policy_on_Excers_the_Voting_
Rights.pdf.

3 Corporate Governance

87

As per the SEBI circular no. IMD/CIR/No 18/198647/2010 dated


March 15, 2010, AMCs are required to frame a general policy and procedure for exercising the voting rights in respect of shares of listed companies held by them and disclose the same on the website of the respective
AMC as well as in the annual report distributed to the unit holders from
financial year 20102011. Further, the AMCs are also required to disclose the actual exercise of their proxy votes in the AGMs/EGMs of the
investee companies in respect of the following matters:
(a) Corporate governance matters, including changes in the state of
incorporation, merger and other corporate re-structuring, and antitakeover provisions.
(b) Changes to capital structure, including increases and decreases of
capital and preferred stock issuances.
(c) Stock option plans and other management compensation issues.
(d) Social and corporate responsibility issues.
(e) Appointment and removal of directors.
(f ) Any other issue that may affect the interests of the shareholders in
general and interests of the unit-holders in particular. As the
Investment Manager of various Schemes of UTI MF, UTI AMC
believes in enhancing and protecting the value of investment of its
unit holders. One of the missions of UTI AMC is to be a socially
responsible organization known for best corporate governance. UTI
AMC further believes that it is its duty to protect the interests of unit
holders from unscrupulous acts of some of the promoters and management of such companies.
To protect the interests of its unit holders, in line with its mission,
existing practices and SEBI guidelines, UTI AMC has framed the following policy on exercising the voting rights in investee companies.
UTI MF Voting Policy
The investments of UTI MF schemes are guided by internal guidelines,
inter alia, to invest in companies which have acceptable standards of
effective management, follow good corporate governance practices and

88

The Management of Mutual Funds

have fundamental strengths. The voting policy will continue to be guided


as listed here, keeping in view the adherence to sound management practices by investee companies.
(i) Routine matters like (a) Approving Balance Sheet & Profit and loss
Account, (b) Appointment of directors, (c) Appointment of Auditor,
(d) Fixation of remuneration of Auditors/Directors may not be
objected in the normal course unless and otherwise it adversely
affects the interests of the unit holders.
(ii) Voting in respect of any important agenda items/Resolutions affecting to our investment like
(a) Merger, Demerger, Acquisition, hiving off division, takeover
proposal: UTI AMC will continue to generally support merger/
demerger/acquisition/hiving off division of company if the same
enhances equity shareholders wealth, is carried out in a transparent, conducive environment, is within the applicable laws,
rules and regulations of the country and does not otherwise
adversely affect the interests of the unit holders of the schemes
of UTI MF.Any hostile takeover by an investee company will be
generally discouraged by UTI AMC.
(b) Diversification, expansion, incorporation of subsidiary company, related party transaction: UTI AMC will continue to
welcome and encourage expansion/diversification of the companys businesses which have the potential to enhance shareholder value. Unrelated diversification by the company, where
UTI AMC understands that the company has no expertise and
experience and which could prove a drain on the companys
capital, will not be encouraged. Companys related party transactions will continue to be examined carefully to protect the
value of investment.
(c) Changes to capital structure: Companies raising capital for
business growth will generally be supported if the investment
value of existing shareholders is not adversely affected.

3 Corporate Governance

89

(d) Preferred stock issuance, stock option plans, unreasonable


Bonuses and/or compensation to management: UTI AMC
believes in rewarding people, who perform well and assist their
company to achieve its goals and objectives. However, any
undue and unreasonable bonuses or remuneration etc. paid to
managerial staff more particularly during turbulent periods for
the company and undue favour to managerial staff or the
Promoter Group will not be supported.
(e) Proposal of unusual high payments for any purpose, Social
and Corporate responsibility issue: UTI AMC permits proposal for payment for performing social and corporate responsibility obligations which are within the laws of the land. Any
unusual/higher payments will be opposed.
(f ) Appointment and Removal of Directors: UTI AMC will continue to encourage having the maximum number of professional, experienced and independent directors on the Board to
ensure a high level of corporate governance in the investee company. UTI AMC generally supports the appointment of directors, who possess a good track record.
(g) Changes inlocation of the registered office of the company or
any other matters including those as mentioned above that may
affect the interests of shareholder, will be decided based on factors including equity holding in the company, impact on UTI
AMCs investment, adequacy of information, conflict of interest
and protection of shareholders interests.
(iii) In addition to the above, depending on the nature of other proposed
agendas which are not specifically covered above, the fund management team, in consultation with the research team and if required
other concerned departments of UTI AMC, will take an appropriate
view to protect the value of investment in the investee company.
If required, UTI AMC may consult other shareholders of the company
in respect of the agenda/s proposed to be objected to protect the interests
of unit holders.

90

The Management of Mutual Funds

UTI AMC will generally follow the voting policy as detailed above,
but if the relevant facts and circumstances so warrant, it may act differently to protect the interests of its unit holders.
Conflict of Interest Policy for investment in Group Companies of UTI
AMC and investment in Companies which have invested in the Schemes
of UTI MF:
Investment by the Schemes of UTI MF in the Group Companies of
UTI AMC, if any, will be made in accordance with the SEBI (Mutual
Funds) Regulations 1996 and reports for such investments will also be
filed with SEBI as required under these Regulations. In such cases, UTI
AMC also recognizes that there may be potential conflict of interest when
UTI AMC will have to make a decision for voting on Resolutions of
(a) Entities including the group companies of UTI AMC or otherwise
with which it may have some relationship, and
(b) Companies that have substantial investments in the units of the
scheme/s of UTI MF.
In such circumstances, UTI AMC will continue to review all voting
proposals, routine as well as non-routine, and perform its duties in a
responsible manner keeping in mind the best interests of unit holders, in
line with the regulatory requirement.
Circumstances Favoring Abstaining from Voting Depending upon the
agenda items, there can be instances where the UTI AMC may not attend
the meeting, if it is not impacting materially on either the shareholders
value or the interests of unit holders, for instance.
Applicability The policy applies to exercise the voting rights/proxy votes
by the nominated members of UTI AMC in the AGMs/EGMs of equity
shareholders of the investee company where the schemes of UTI MF
have investments.

3 Corporate Governance

91

Decision-Making Process UTI AMC has a well-laid-down decisionmaking process outlining criteria to vote in favor or against or to abstain
on the resolution/agenda items keeping in mind the interests of its
unit holders. A separate cell under Department of Fund Management
(Dealing) of UTI AMC would carry out operational activities related to
this subject.
UTI AMC may utilize the services of unaffiliated third party professional agencies for getting in-depth analyses of proposals, their
voting recommendation and services to exercise proxy voting and
maintenance of related data. Services of third party professional
agencies would be recommendatory in nature and not binding on
UTI AMC.UTI AMC would only make a final decision if voting on
proposals.
Review, Control and Modification The Boards of UTI AMC and UTI
Trustees will review the voting policy whenever there is need after changes
in statutory/regulatory guidelines and policies. UTI AMC management
may review and modify, if required, its decision-making process, delegation of power and internal control mechanism as per requirements from
time to time.
Reporting to the Board The Board of UTI AMC and UTI Trustees
would be apprised regarding voting exercised by UTI AMC on behalf of
its scheme on a yearly basis.
Disclosure and Record Keeping The data on voting exercised or otherwise is maintained in electronic/physical mode covering all equity holdings across all schemes of UTI MF and the same is disclosed on the UTI
MF website as well as in the annual report distributed to the unit holders
as per the format prescribed by SEBI from time to time.

92

The Management of Mutual Funds

SEBI Report8 on Voting Pattern in Mutual Funds The objectives of the


report are:
To assess the pattern of voting by mutual funds in ensuring better
corporate governance practices at investee companies
To assess the quality of reporting of voting done by mutual funds
To allow mutual funds to benchmark themselves against best practices
amongst their peers
The report covers annual general meetings (AGMs), postal ballots
(PBs), court convened meetings (CCMs) and extraordinary general meetings (EGMs) of the investee companies between April 2012 and March
2013. An analysis of the voting patterns of the mutual fund houses indicates that most Indian mutual funds have either voted in favor of proposals or have decided to largely abstain from voting in resolutions put forth
by their investee companies. The number of instances where a mutual
fund has voted against a proposal is very low. No significant improvements are seen in voting participation by AMCs in shareholder meetings
compared to the previous two years. Mutual funds have disclosed a total
of 5,460 meetings consisting of 3,724 AGMs, 858 PBs, 323 CCMs and
555 EGMs for the year 20122013. Out of the total 28,290 resolutions
disclosed, mutual funds have voted against just 1.5 % of the resolutions,
whereas they have voted for 47.0 % of the resolutions and abstained from
voting in 51.5 % of the resolutions.
Out of 43 mutual funds, two of them have completely abstained from
any voting and hence have not made any voting disclosures on their websites/annual reports for the financial year 20122013. Of the remaining
41 fund houses, some of them have either reported data inconsistently
or have represented voting disclosures even in the third year of reporting.
Mutual funds are still deviating from the SEBI-prescribed format while
disclosing voting data in many aspects, as listed below:

http://www.ingovern.com/wp-content/uploads/2013/08/Mutual-Funds-Voting-Patterns-2013Analysis.pdf.

3 Corporate Governance

93

Non-disclosure of individual resolutions and their respective voting


records
Clubbing of resolutions or meeting types while reporting
Non-disclosure of voting information on routine resolutions and nondisclosure of meetings which the mutual funds have abstained from
Incomplete data disclosure, with only a few meetings disclosed in the
year

10

Conclusion

In this chapter we have discussed corporate governance issues in the


mutual fund industry. Good corporate governance in the industry
addresses the principles of government and public enterprise relationships and creates the fundamental pillars on which the governing board
can base effective behavior. The corporate governance of financial institutions in developing economies is important for several reasons. In
developed economies, the protection of depositors in a deregulated environment is typically provided by a system of prudential regulation, but
in developing economies such protection is undermined by the lack of
well-trained supervisors, inadequate disclosure requirements, the cost of
raising capital and the presence of distributional cartels. This chapter also
illustrates corporate governance practices in various countries across the
world, including Australia, Canada, New Zealand, Scotland and UAE.
Indian financial markets are facing some problems in implementing
corporate governance. Since most corporate entities in the country are
protected by government rules and regulations, employees are somewhat
negligent towards implementation of corporate governance. However, all
public sector firms are now facing severe competition from the private
sector. Corporate governance in the financial sector is being implemented
under the guidance and regulations of SEBI and RBI in India.

4
Benchmarking

Introduction

This chapter focuses on benchmarking in the mutual fund industry.


Benchmarking is a tool that is used to judge the performance of mutual
funds against a standard or benchmark decided for the particular
scheme. The benchmark fund varies according to the nature of fund and
the decisions made by the manager of the asset management company
(AMC) of the respective scheme/fund.
Benchmarking is a process used in management and particularly in
strategic management, in which organizations evaluate various aspects
of their processes in relation to best practice, usually within their sector.
This system allows organizations to develop plans on how to adopt best
practice, usually with the aim of increasing some aspect of performance.
Benchmarking may be a one-off event, but it is often treated as a continuous process in which organizations continually seek to challenge their
practices. A process similar to benchmarking is also used in technical
product testing and in land surveying.
As an investor, three important considerations are required while
investing in mutual funds: (a) find out how the scheme has performed.
The Author(s) 2017
G.V.S. Sekhar, The Management of Mutual Funds,
DOI10.1007/978-3-319-34000-5_4

95

96

The Management of Mutual Funds

(b) find out how the fund fared in comparison with its peers (c) find out
the performance of the fund vis--vis the market benchmark.
Benchmarking: A Myth Bruce A.Costa, Keith Jakob, Scott J.Niblock
and Elisabeth Sinnewes study suggests that active Australian equity fund
managers do not out-perform their self-specified capitalization indexes
after risk and management fees and transaction costs.1 Alex Frino and
David R.Gallaghers study documents the existence of significant tracking error for Australian index funds. 2
We should understand that the benchmark fund is also based on market fluctuations; hence it cannot be taken for granted that it will always
perform better. Friend, Brown, Herman and Vickers (1962) offered the
first empirical analysis of mutual funds performance.3 This study found
that the average returns by mutual funds were similar to those delivered by the benchmark index. It concluded that since the managed funds
were not able to outsmart the benchmark index, it indicated the presence
of market efficiency in the stock markets. Eun, Kolodny and Resnicks
(1991) study used various benchmarks to link the Standard and Poors
(S&P) 500 Index, the Morgan Stanley Capital International World
Index, and a self-constructed index of US multinational firms.4
Ramesh Chanders (2006) study examined the investment performance of managed portfolios with regard to sustainability of such performance in relation to fund characteristics, parameter stationarity and
benchmark consistency.5

Bruce A Costa, Keith Jakob, Scott J Niblock and Elisabeth Sinnewe, Benchmarking the benchmarks: How do risk-adjusted returns of Australian mutual funds and indexes measure up?, Journal
of Asset Management 16, 386400 (November 2015) | doi:10.1057/jam.2015.29
2
Alex Frino and David R.Gallagher, Is Index Performance Achievable?: An Analysis of Australian
Equity Index Funds, Abacus, Vol. 38(2): pp.200214, 2002
3
Friend, I., F.E. Brown, E.S. Herman and D. Vickers (1962), A Study of Mutual Funds,
U.S.Government Printing Office, Washington, D.C.
4
Eun, C.S., R.Kolodny and B.G.Resnick (1991), U.S.Based International Mutual Funds: A
Performance Evaluation, The Journal of Portfolio Management 17, Spring, pp.8894.
5
Ramesh Chander (2006), Informational Efficiency, Parameter Stationarity and Bench Mark
Consistency of Investment Performance, The ICFAI Journal of Applied Finance, March.
1

4Benchmarking

97

The Statman Model is used for mutual funds using the following
equation6:
eSDAR ( excess standard deviation and adjusted return) = Rf+(Rp
Rf )(Sm/Sp)Rm
In this formula:
Rf: monthly return on three-month treasury bills,
Rp: monthly return on fund portfolio,
Rm: monthly return on the benchmark index,
Sp: standard deviation of portfolio ps return,
Sm: standard deviation of return on the benchmark index. This model
is used for short-term investment analysis. The performance is compared
with its benchmark on a monthly basis.
Chang etal (2003) identified a hedging factor in the equilibrium asset
pricing model and used it as a benchmark to construct a new performance measure.7 The model adopted by Jow-Ran Chang, Nao-Wei Hung
and Cheng-Few Lee is based on a competitive equilibrium version of the
inter-temporal asset pricing model derived in Campbell. The dynamic
asset pricing model incorporates hedging risk as well as market. Formally,
the pricing restrictions on asset i imported by the conditional version of
the model are:

Et ri ,,t +1 r f ,t +1 = Vi I / 2 + Vim + ( 1) Vih

Where:
Etri, t+1 ; is log return on asset,
r f,t+1 is log return on riskless asset,
Vii denotes Vart (ri,t+1),
is the agents coefficient of relative risk aversion,
Vim denotes Covt (ri,t+1, rm,t+1),
Vih=Covt(ri,t+1,(Et+1Et),j=1jrm,t+1+j),
Statman M, Socially responsible Mutual Funds, Financial Analysts Journal, Vol.56, 2000,
pp3038.
7
Jow-Ran Chang, Mao-Wei Hung & Cheng-few Lee (2003), An Intertemporal CAPM approach
to Evaluate Mutual Fund Performance, Review of Quantitative Finance and Accounting, 20:
425433.
6

98

The Management of Mutual Funds

the parameter:
=1exp(cw) and cw is the mean log consumption to wealth
ratio.

 elevance ofBenchmark inInvesting


R
inMutual Funds

The idea behind investing in a specialized fund, be in a diversified or


sectoral fund, is to outperform the market benchmark. If the fund is not
able to beat the benchmark, there is something wanting in the investment skills of the fund manager. For example, an investor might want
to invest in an index fund, where the costs are lower and there is no risk
of a great downslide. This is because an index fund invests only in stocks
in proportion to their weightage in the index. It is a passive investment
strategy. The returns would be in tandem with the movement of index,
save for a small tracking error. Since these funds do not have to churn
their portfolio heavily, the transaction costs are also lower. In addition,
investors do not have worry about the performance record of the fund
manager, as investing in an index is not rocket science.

Benchmark Returns

Benchmark returns will give you a standard by which to make the comparison. It basically indicates what the fund has earned compared to what
it should have earned. A funds benchmark is an index that is chosen
by a fund company to serve as a standard for its returns. The market
watchdog, the Securities and Exchange Board of India (SEBI), has made
it mandatory for funds to declare a benchmark index. In effect, the fund
is saying that the benchmarks returns are its target and a fund should be
deemed to have done well if it manages to beat the benchmark.
Let us assume the fund is a diversified equity fund that has benchmarked itself against the Sensex; so the returns of this fund will be compared to the Sensex. If the markets are doing fabulously well and the

4Benchmarking

99

Sensex keeps climbing steadily upwards, then any less than fabulous
returns from the fund would actually be a disappointment.
If the Sensex rises by 10 % over two months and the funds net asset
value (NAV) rises by 12 %, it is said to have outperformed its benchmark. If the NAV rose by just 8 %, it is said to have underperformed
the benchmark.
But if the Sensex drops by 10 % over a period of two months and during that time, the funds NAV drops by only 6 %, then the fund is said
to have outperformed the benchmark.
A funds returns compared to its benchmark are called its benchmark
returns.
At the current high point in the stock market, almost every equity fund
has done extremely well but many of them have negative benchmark
returns, indicating that their performance is just a side-effect of the
markets rise rather than some brilliant work by the fund manager.

Analysis ofSelect Mutual Funds

The following note was provided by India Index Services & Products
Limited (IISL) as a caution to investors:
IISL is not responsible for any errors or omissions or the results obtained
from the use of such index and in no event shall IISL have any liability to
any party for any damages of whatsoever nature (including loss of profit)
resulted to such party due to purchase or sale or otherwise of such product
benchmarked to such index.

Benchmark Mutual Fund inIndia

Benchmark Mutual Fund, which specializes in managing exchange


traded funds (ETFs), has lined up a scheme that will try to generate
returns through investment in securities represented by a host of sectoral
indices. The indicesthe offer document sent to SEBI mentions nine of

100

The Management of Mutual Funds

themare owned by IISL, the joint venture formed by National Stock


Exchange (NSE) and CRISIL to provide a variety of indices and index-
related services for the capital market. These indices cover the following
sectors: Automobiles/four-wheelers, cement, electrical equipment, pharmaceuticals, power, steel, telecoms, services and information technology.
They include S&P CNX Pharmaceutical Index, S&P CNX Cement and
Cement Product Index, and S&P CNX Power Index. The ETFs investment objective is to provide returns that, before expenses, closely correspond to the total returns of the securities as represented by the index.
Its performance, however, may differ owing to tracking error. The
plan is to use a passive or indexing approach, with no intention to beat
the market. Therefore, the scheme will not try out transitory defensive
positions when the market weakens or looks overvalued. Here, the offer
document has stated that the ETF will invest at least 90 % of its assets in
the stocks of its underlying index.

Performance Comparison
withBenchmark FundsIndia

This section deals with analysis of select mutual funds and their
performance against a benchmark fund. The following schemes are considered for the study:
Table 4.1: UTI Equity Fund vs. S &P BSE 100
Table 4.2: SBI Blue Chip FundDirect Plan (G) vs. S&P BSE 100
Table 4.3: Birla Sunlife Frontline Equity Fund (G) vs. S&P BSE 100
Table 4.4: SBI Magnum Equity Fund (G) vs. NIFTY 50
Table 4.5: HDFC Equity Fund vs. NIFTY 50
Table 4.6: HDFC Index Fund-Sensex PlanDirect Plan vs. S&P BSE
Sensex
Table 4.7: HDFC Top 200 Fund (G) vs. S&P BSE 200
Table 4.8: Kotak 50 Regular Plan (G) vs. NIFTY 50
Table 4.9: IDBI India Top 100 Fund (G) vs. NIFTY 100
Table 4.10: ICICI Prudential Top 100 Fund (G) vs. CNX NIFTY

4Benchmarking

101

Table 4.1 UTI Equity Fund-comparison with benchmark fund as on January 26,
2016
3
1
month months
(%)
(%)
6.2
10.6
5.5
8.7
0.7
1.9

Fund returns
Category avg
Difference of fund
returns and
category returns
Best of category
1.9
Worst of category
8.4
Benchmark returnsa 5.3
0.9
Difference of fund
returns and
benchmark returns

4.9
14.5
10.7
0.1

6
months
(%)
11.7
11.7
0.0

1 year
(%)
11.0
10.8
0.2

2
years
(%)
17.2
13.3
3.9

3
years
(%)
13.7
10.0
3.7

5
years
(%)
10.9
6.6
4.3

2.1
19.5
14.0
2.3

15.5
26.0
14.9
3.9

34.0
2.5
9.0
8.2

21.4
1.3
7.2
6.5

14.5
1.0
5.3
5.6

Benchmark index: S&P BSE 100

Table 4.2SBI Blue Chip FundDirect Plan (G)(Rank 1)comparison with


benchmark fund as on January 26, 2016

Fund returns
Category avg
Difference of fund
returns and
category returns
Best of category
Worst of category
Benchmark returnsa
Difference of fund
returns and
benchmark returns

3
1
month months
(%)
(%)

6
months
(%)

1 year
(%)

2
years
(%)

3
years
(%)

5
years
(%)

5.1
5.5
0.4

6.4
8.7
2.3

8.6
11.7
3.1

2.9
10.8
7.9

22.5
13.3
9.2

17.1
10.0
7.1

6.6

1.9
8.4
5.3
0.2

4.9
14.5
10.7
4.3

2.1
19.5
14.0
5.4

15.5
26.0
14.9
12.0

34.0
2.5
9.0
13.5

21.4
1.3
7.2
9.9

14.5
1.0
5.3

Benchmark index: S&P BSE 100

102

The Management of Mutual Funds

Table 4.3 Birla Sun Life Frontline Equity Fund (G)( Rank 2) as on January 26, 2016
3
1
month months
(%)
(%)
Fund returns
Category avg
Difference of fund
returns and
category returns
Best of category
Worst of category
Benchmark returnsa
Difference of fund
returns and
benchmark returns
a

6
months
(%)

1 year
(%)

2
years
(%)

3
years
(%)

5
years
(%)

5.9
5.9
0.0

8.8
8.1
0.7

9.6
9.5
0.1

11.7
11.4
0.3

19.4
15.2
4.2

13.5
10.0
3.5

11.3
7.0
4.3

1.9
9.1
6.6
0.7

4.9
13.8
9.6
0.8

2.1
16.8
10.7
1.1

15.5
26.6
14.5
2.8

36.9
4.5
13.5
5.9

22.4
1.2
8.3
5.2

15.5
1.5
5.9
5.4

Benchmark index: S&P BSE 200

Table 4.4 SBI Magnum Equity Fund (G) (Rank-3)comparison with benchmark
fund as on January 26, 2016
3
1
month months
(%)
(%)
Fund returns
Category avg
Difference of fund
returns and
category returns
Best of category
Worst of category
Benchmark returnsa
Difference of fund
returns and
benchmark returns
a

6
months
(%)

1 year
(%)

2
years
(%)

3
years
(%)

5
years
(%)

5.8
5.9
0.1

8.0
8.1
0.1

7.3
9.5
2.2

10.0
11.4
1.4

18.6
15.2
3.4

11.8
10.0
1.8

10.3
7.0
3.3

1.9
9.1
6.2
0.4

4.9
13.8
10.0
2.0

2.1
16.8
11.1
3.8

15.5
26.6
16.5
6.5

36.9
4.5
10.1
8.5

22.4
1.2
7.0
4.8

15.5
1.5
5.5
4.8

Benchmark Index: NIFTY 50

4Benchmarking

103

Table 4.5 HSBC Equity Fund (G)comparison with benchmark fund as on January
26, 2016

Fund returns
Category avg
Difference of fund
returns and
category returns
Best of category
Worst of category
Benchmark returnsa
Difference of fund
returns and
benchmark returns

3
1
month months
(%)
(%)

6
months
(%)

1 year
(%)

2
years
(%)

3
years
(%)

5
years
(%)

6.5
5.9
0.6

8.9
8.1
0.8

10.9
9.5
1.4

15.5
11.4
4.1

12.2
15.2
3.0

7.2
10.0
2.8

5.3
7.0
1.7

1.9
9.1
6.6
0.1

4.9
13.8
9.6
0.7

2.1
16.8
10.7

15.5
26.6
14.5

36.9
4.5
13.5

22.4
1.2
8.3

15.5
1.5
5.9

Note: Returns over 1 year are Annualized


Benchmark index: NIFTY 50

Table 4.6 HDFC Index Fund Sensex Plus PlanDirect Plan

Fund returns
Category avg
Difference of fund
returns and
category returns
Best of category
Worst of category
Benchmark returnsa
Difference of fund
returns and
benchmark returns

3
1
month months
(%)
(%)

6
months
(%)

1 year
(%)

2
years
(%)

3
years
(%)

5
years
(%)

5.7
5.5
0.2

10.8
8.7
2.1

14.5
11.7
2.8

16.0
10.8
5.2

10.0
13.3
3.3

8.1
10.0
1.9

6.6

1.9
8.4
4.5
1.2

4.9
14.5
11.0
0.2

2.1
19.5
14.3
0.2

15.5
26.0
15.8
0.2

34.0
2.5
7.0
3.0

21.4
1.3
6.9
1.2

14.5
1.0
5.0

Benchmark index: S&P BSE SENSEX

104

The Management of Mutual Funds

Table 4.7 HDFC Top 200 Fund (G)

Fund returns
Category avg
Difference of fund
returns and
category returns
Best of category
Worst of category
Benchmark returnsa
Difference of fund
returns and
benchmark returns
a

3
1
month months
(%)
(%)

6
months
(%)

1 year
(%)

2
years
(%)

3
years
(%)

5
years
(%)

8.4
5.5
2.9

12.8
8.7
4.1

15.8
11.7
4.1

18.6
10.8
7.8

12.4
13.3
0.9

8.4
10.0
1.6

6.8
6.6
0.2

1.9
8.4
5.4
3.0

4.9
14.5
10.2
2.6

2.1
19.5
13.4
2.4

15.5
26.0
13.3
5.3

34.0
2.5
11.4
1.0

21.4
1.3
8.2
0.2

14.5
1.0
5.7
1.1

3
1
month months
(%)
(%)

6
months
(%)

1 year
(%)

2
years
(%)

3
years
(%)

5
years
(%)

3.7
3.5
0.2

6.4
5.2
1.2

10.6
10.2
0.4

8.9
9.5
0.6

20.9
16.8
4.1

12.5
11.0
1.5

10.4
7.8
2.6

1.9
6.7
5.1
1.4

4.9
10.0
6.1
0.3

2.1
17.2
11.6
1.0

15.5
24.1
14.1
5.2

38.6
6.2
12.2
8.7

23.3
2.5
8.0
4.5

16.9
2.6
6.9
3.5

Benchmark index: S&P BSE 200

Table 4.8 Kotak 50Regular Plan (G)

Fund returns
Category avg
Difference of fund
returns and
category returns
Best of category
Worst of category
Benchmark returnsa
Difference of fund
returns and
benchmark returns
a

Benchmark index: NIFTY 50

4Benchmarking

105

Table 4.9 IDBI India Top 100 Equity Fund (G)

Fund returns
Category avg
Difference of fund
returns and
category returns
Best of category
Worst of category
Benchmark returnsa
Difference of fund
returns and
benchmark returns

1 year
(%)

2
years
(%)

3
years
(%)

5
years
(%)

12.6
10.2
2.4

9.7
9.5
0.2

20.0
16.8
3.2

14.4
11.0
3.4

7.8

2.1
17.2
11.6
1.0

15.5
24.1
13.0
3.3

38.6
6.2
14.0
6.0

23.3
2.5
8.9
5.5

16.9
2.6
7.5

3
1
month months
(%)
(%)

6
months
(%)

4.6
3.5
1.1

6.6
5.2
1.4

1.9
6.7
5.7
1.1

4.9
10.0
6.2
0.4

Benchmark index: NIFTY 100

Table 4.10 ICICI Prudential Top 100 Fund (G)

Fund returns
Category avg
Difference of fund
returns and
category returns
Best of category
Worst of category
Benchmark returnsa
Difference of fund
returns and
benchmark returns

3
1
month months
(%)
(%)

6
months
(%)

1 year
(%)

2
years
(%)

3
years
(%)

5
years
(%)

3.8
3.5
0.3

2.7
5.2
2.5

5.6
10.2
4.6

10.0
9.5
0.5

17.2
16.8
0.4

12.6
11.0
1.6

11.4
7.8
3.6

1.9
6.7
5.1
1.3

4.9
10.0
6.1
3.4

2.1
17.2
11.6
6.0

15.5
24.1
14.1
4.1

38.6
6.2
12.2
5.0

23.3
2.5
8.0
4.6

16.9
2.6
6.9
4.5

Benchmark index: CNX NIFTY

106

The Management of Mutual Funds

This study shows that the benchmark varies according to scheme and
the fund selection behavior of fund managers. The details of the List of
Indices used for benchmark is given in the appendix.

6.1

Performance Analysis

Table 4.1 indicates the performance of UTI Equity Fund vs. S&P BSE
100. It shows that the fund returns are better than that of benchmarks
for the holding periods of two years, three years and five years. In the
long term the fund yield is better than the short term. Investors can get
17.2 % for the two year holding period, which is 8.2 % more than that
of benchmark return.
Table 4.2 indicates the performance of SBI Blue Chip Fund-Direct
Plan (Growth option). The data reveals that there is consistent improvement in the returns after a two-year period; that is, 22.5 %. However, this
fund yields a negative return up to the one year holding period. It also
shows that the category average also performed negative returns during
this period.
Table 4.3 shows the performance of Birla Sunlife Frontline Equity
Fund (G) vs. S&P BSE 200. It reveals that this funds returns are better
than that of the category average and benchmark fund, but it is not showing better performance than best of category.
Table 4.4 indicates the performance of SBI Magnum Equity Fund (G)
vs. NIFTY 50. It was observed that the funds returns are negative up to
a one year holding period and high positive returns are expected after
two years. It was also found that the funds performance is better than
category average and benchmark.
Table 4.5 depicts HSBC Equity Fund (G). It was found that this
funds performance is lower than that of the benchmark fund. Its average
returns are also less than the category average. Thus, it may be stated this
fund manager has to improve his performance. The benchmark is NIFTY
50.
Table 4.6 shows HDFC Index Fund Sensex Plus PlanDirect Plan
Option. This fund is showing negative performance against category
average and benchmark fund. At the same time this funds return has

4Benchmarking

107

also declined to 8 % (three years) from 10 % (two years). The benchmark


index is S&P BSE SENSEX.
Table 4.7 shows HDFC Top 200 Fund Growth Option compared with
S&P BSE 200. It was found that there were negative returns for this fund
up to a one-year period. The same trend is observed for category average
and benchmark fund. This funds performance is marginally above that
of the benchmark fund.
Table 4.8 depicts JP Morgan India Equity Fund (G). It has achieved
the highest return over the benchmark fund. The fund return is 21.8 %
for the holding period of two years. However, it shows a negative return
up to a one-year period.
Table 4.9 illustrates IDBI India Top 100 Equity Fund (G). It shows a
better performance during the one-year and five-year periods compared
to its benchmark index. Here NIFTY 100 is taken as a benchmark to
measure the performance.
Table 4.10 depicts ICICI Prudential Top 100 Fund (G) and compares
it with CNX NIFTY.This funds performance is better from the three-
year period onwards. However, its benchmark returns and fund returns
are found to be negative up to a two year holding period.

Summary

This chapter is devoted to understanding the process of benchmarking in


the mutual fund industry. Benchmarking is a tool that is used to judge
the performance of mutual funds against a standard or benchmark
decided for the particular scheme. The benchmark fund varies according to the nature of the fund and decisions made by the manager of the
AMC of the respective scheme/fund. This chapter focuses on the benchmarking process across various countries and provides a case study of
select schemes in India. It should be noted that benchmark funds also fail
in gaining expected returns. The authenticity and validity of selecting a
benchmark is to be addressed by a fund manager.

5
Asset Management

Introduction

Every mutual fund organization must have an asset management company


(AMC), which plays a vital role in market fluctuations. The assets accumulated by mutual fund organizations are looked after by the AMC.The
assets have to be deployed in the market to gain returns that are passed
on to the investors as competition in the industry stiffens. There is huge
pressure on the fund managers to beat competitors and their benchmarks.
Managing all this is a huge workload for a fund manager.
Massimo Masa and Lei Zhang (2008) observed the importance of organizational structure in AMCs for mutual funds.1 Their study found that
funds with more hierarchical structures invested less in firms located close
to them and performed more poorly than those with non-hierarchical
structures. Manuel Ammann and Michael Verhofen (2008) examined the
impact of prior performance on the risk-taking behavior of mutual fund

Massimo Massa and Lee Xhang (2008), The Effects of Organizational Structure on Asset
Management, http://ssrn.com/abstract=1328189.

The Author(s) 2017


G.V.S. Sekhar, The Management of Mutual Funds,
DOI10.1007/978-3-319-34000-5_5

109

110

The Management of Mutual Funds

managers.2 The study found that performance in the first half of the year
had, in general, a positive impact on the choice of risk level in the second
half of the year. David M. Smith (2009) discussed the size and market
concentration of the mutual fund industry, the market entry and exit of
mutual funds, the benefits and costs of mutual fund size changes, principal
benefits and costs of ownership from fund shareholders perspective and so
on.3 Lalit (1997) carried out a study of mutual funds and their regulatory
framework.4 He also critically reviewed the performance and working of
the Securities and Exchange Board of India (SEBI) as related to schemes,
discussing the portfolio management of some Indian fund managers.
This chapter is based on managing risk by AMCs in general, with a particular focus on HDFC Asset Management Company Limited (HDFC AMC
Ltd). It provides a comparative analysis of fund management in HDFC
AMC Ltd and Standard Chartered AMC Pvt. Ltd. This chapter also analyses the performance of HDFC Equity Fund and Standard Chartered Classic
Equity Fund (SCCEF) as regards the returns the fund has generated.
In the lastfive to eight years the mutual fund industry has dramatically changed in terms of its structure, players in the market, acceptance
by investors and so on. This has led to a sharp rise in the number of
schemes offered by different mutual funds, and the amount raised by
these offers is unimaginable.

Recent Status ofGlobal Asset


Management5

The USA
On January 17, 2013, the US Department of the Treasury and the Internal
Revenue Service (IRS) issued their Foreign Account Tax Compliance Act
(FATCA) regulations. These were enacted to prevent and detect offshore tax
2

Manuel Ammann and Michael Verhofen (2008), The Impact of Prior Performance on the RiskTaking of Mutual Fund Manager, Annals of Finance, Issue 5, 6990.
3
David M Smith (2009), The Economics of Mutual Funds, Chapter-3 of forthcoming in John A
Haslem (ed.) A Companion to Mutual Funds, John Wiley Sons, USA.
4
Lalik K Bansal (1997), Mutual Fund- Management and Working, Deep & Deep Publishers,
New Delhi.
5
CII report onMutual fund Summit, 2014, Indian Mutual fund industry-challenging thestatus
quo, setting thegrowth path.

Asset Management

111

evasion by US tax-payers. The FATCA regime imposes substantial new due


diligence requirements on foreign financial institutions (FFIs) in relation
to the holders of financial accounts and requires reporting and withholding in certain circumstances. Compliance with FATCA involves not only
understanding what the regulations require, but also what the inter-governmental agreement (IGA) and local laws demand. For the Indian mutual
fund industry, the various due dates that must be observed to comply with
FATCA have already been prescribed. On July 1, 2014 participating FFIs
were expected to have new on-boarding procedures to enable the classification of new customers and investors. Further, FATCA withholding also
commenced on July 1, 2014 for the payment of US-sourced fixed, determinable, annual, periodical (FDAP) income, subject to certain exceptions.
India has recently been included by the US Treasury on the list of the countries that have substantively reached the IGA standards, and has agreed in
principle to sign Model 1 IGA.If India were to sign Model 1 IGA, then
financial institutions (including asset managers) in India would be required
to undertake reporting to a regulator in India (e.g. Central Board of Direct
Taxes), which will then share the information with the US IRS.
Asia
The cross-border selling of collective investment funds (mutual funds or
unit trusts) is not allowed in most countries in the Asia Pacific region. To
address this and make the distribution of fund products across jurisdictions easier, various governments and asset managers have been discussing
the creation of a common platform to allow collective investment funds
to be manufactured in one country and sold across multiple countries in
the region. This has led to the emergence of fund passporting. The three
fund passports that have been announced in the Asia Pacific region are as
follows:
Mutual fund recognition scheme between China and Hong Kong
Proposed Asia Region Fund Passport Agreement between Australia,
South Korea, Singapore and New Zealand
Memorandum of understanding between Singapore, Malaysia and
Thailand to enable cross-border offering of collective investment
schemes. These proposals offer investment managers additional avenues to sell the same product in more than one country.

112

The Management of Mutual Funds

China
In July 2013, Shanghai put forward the Qualified Domestic Limited
Partners (QDLP) Program, which permitted qualified household private Renminbi (RMB) assets to be built up in Shanghai in order to put
resources into seaward securities markets. Every benefit administrator
who partakes will have an individual share of US $50 million to trade
the RMB stores raised from Chinese financial specialists for outside coin,
which will put resources into the overseas securities market. The QDLP
program provides another channel to overseas resource supervisors to
access Chinese household capital, especially from institutional speculators and people with high total assets. It is foreseen that the aggregate
volume of these QDLP assets will build in the future.
Hong Kong and China
On August 29, 2013, China and Hong Kong consented to an arrangement that allows both nations budgetary controllers to perceive each
others common assets. This common asset acknowledgment plan will
open up Chinese retail and institutional speculators gigantic reserve
funds pool to Hong Kong and to other worldwide resource administrators. In the future Hong Kong will be the portal through which global
resource administrators will be able to take advantage of the market in
this area. This will allow Hong Kong to remain as a global asset focus and
also give it an unmistakable seaward RMB focus. Such a move will urge
worldwide resource administrators to reconsider their proximity to Hong
Kong and the ways in which they can interact with the area.
Japan
Among all the measures taken by the Japanese authorities to incentivize
households to invest their assets in the financial market, the Japanese
Individual Savings Account (NISA) scheme is expected to provide the
greatest opportunities for the asset management industry. In the retail
market segment, NISAs could be the long-awaited catalyst that will
turn investment trusts into long-term asset-building products for Japans
retail public (the rules essentially prohibit short-term trading). NISAs
are designed to encourage demographic groups that have historically not
been part of the investor class to become long-term investors.

Asset Management

113

NISAs will provide tax exempt treatment of capital gains and dividend
income from listed equities and equity investment trusts. Individuals will
be permitted to invest up to 1 million annually in NISAs for ten years
through to 2023. Once an eligible asset is purchased in a NISA, capital
gains and dividends from the asset will be exempt from tax for a maximum of five years.
Europe
The Alternative Investment Fund Managers Directive (AIFMD) is a
European Directive that aims to provide a harmonized regulatory and
supervisory framework for the managers of alternative investment funds
within the EU.The deadline for EU member states to adopt the AIFMD
in their national laws was July 2013.
United Kingdom
The European Commission (EC) published a proposed regulation on
money market funds (MMF) on September 4, 2013, forming part of
the ECs response to the on-going global debate around shadow banking. This new regulation will introduce many additional requirements,
ranging from risk management to data collection and capital buffers.
The UK government announced in its 2013 budget that it wanted to
increase the attractiveness of the UK as an asset management hub. In
view of this, the UK government has published new regulations, effective from December 19, 2013, under which UK-authorized funds are
allowed to pay gross interest distributions on units held by non-UK
resident investors. However, units held by UK residents are still subject
to income tax.
The Netherlands
On December 17, 2013, the Ministry of Finance of the Netherlands published the final text of the commission ban for investment firms. Until
that time, investors in the Netherlands could pay commission (often indirectly) to investment advisors, banks or investment managers. However,
from January 1, 2014, investors would have to directly pay investment
service fees. This applied to every type of investment service provided to
non-professional investors. Therefore, investment firms should no longer

114

The Management of Mutual Funds

Table 5.1 Projections of assets under management by 2020 (in billion US $)


WORLD
America
Europe
Asia and Pacic
India
Pakistan
Japan
Korea
Philippines
Africa

2000

2004

2010a

2020a

Change in amount

11,871.1
7,424.1
3,296
1,134
13.5
0.3
432
110.6
0.01
16.9

16,152.4
8,792.4
5,628.2
1,677.9
32.8
1.8
399.5
177.4
1
54

25,000
5,000
8,000
5,000
35
4.5
300
325
3.5
90

35,000
4,500
7,750
5,500
42
3
350
285
2.3
78

5,000
500
250
500
7
1.5
50
40
1.2
12

Source: Investment Company Fact book 2005


a
Projections made by author.

receive commissions from a third party directly or procure them via third
parties through investment services to the customer.
Table 5.1 focuses on projections of assets under management of mutual
funds by 2020in selected countries. It is expected that India, Japan and
the Asia Pacific region will have positive trends in assets managed by
mutual funds. At the same time a negative trend is expected for select
remaining countries.

Asset Management Industry inAsia6

The asset management industry in Asia is opening up to global financial


markets, but restrictions on foreign capital as well as overseas investment
of funds remain. Domestic funds in the region face restrictions when
investing in offshore markets, which severely restricts competition in
the fund management industry as well as the opportunities for portfolio
diversification.
In China, the first joint-venture fund was established in 1991 and
more than 50 foreign-related mutual funds had been set up by 1995,
6

Ingo Walter and Elif Sisli, The Asset Management Industry in Asia: Dynamics of Growth,
Structure and Performance, (September 7, 2006). Available at SSRN: http://ssrn.com/
abstract=929162.

Asset Management

115

traded both within and outside China. Besides forming joint ventures,
foreign fund management companies have begun to enter the Chinese
market by buying shares inlocal fund managers. Foreign companies are
allowed to take stakes of up to 49 % inlocal fund managers, a ceiling
that is scheduled to rise to 51 % by 2007. The foreign fund management
partner in any Sinoforeign joint venture must have a paid-up capital of
at least Rmb 300 million. Investment in foreign assets remains restricted
in China. In 2003, the State Administration of Foreign Exchange (SAFE)
established new rules for overseas investments by local fund management
companies, requiring them to seek permission before setting up special
foreign exchange capital accounts through which overseas investment
funds must be channeled.
In order to attract foreign capital, Korea abolished all restrictions on
foreign investment in stocks and bonds in 1998. Foreign fund management companies can enter the local fund management industry by establishing a branch, subsidiary or joint venture, or by taking over existing
holdings in an asset management firm. In order to set up a local branch,
the foreign firm must have sufficient experience in the fund management industry and meet international criteria for asset allocation and
operations.
For a foreign asset management firm to be active in the Korean mutual
fund industry, the four key criteria are that: (a) It must already have been
in the asset management business abroad; (b) Its assets under management must exceed W 5 trillion; (c) Its credit rating must be investment
grade; and (d) It must not have been subject to criminal or administrative
sanction in its home country.
In Malaysia, the Securities Commission planned to open the sector to
foreign companies from July 2003, but postponed the liberalization to
give domestic companies more time to strengthen their operations before
facing foreign competitors. From April 2005 Bank Negara Malaysia
allowed mutual funds to raise foreign investments to up to 30 % of funds
under management. Mutual fund managers investing abroad are required
to seek the Securities Commissions prior approval regarding the foreign
exchanges in which they intend to invest.
In Indonesia, Bapepam issued a ruling in August 2002 that allowed
mutual funds to buy offshore securities (public offerings abroad and secu-

116

The Management of Mutual Funds

rities listed on foreign exchanges), as long as information on the securities


can be accessed via the mass media or the internet and total purchases do
not exceed 15 % of net assets.
In the Philippines, the proposed legislation, the Revised Investment
Company Act, aims to diversify the investor base by eliminating restrictions on foreign ownership of investment companies. The bill also proposes to allow foreign mutual funds to sell securities in the Philippines,
provided that a portion of funds raised from any public offer is invested
domestically. In February 2001, in response to prolonged weakness in
the local equities market, the Securities Exchange Commission (SEC)
allowed Philippine-registered mutual funds to invest 20 % of their portfolio in foreign securities. The investments require prior approval from
the central bank if they exceed US $6 million annually. Mutual funds
issued outside the Philippines cannot be sold in the country unless they
are registered with the SEC.
In Singapore, offshore mutual funds and unit trusts have been able to
offer units to Singapore residents since July 2002.
In Thailand in 2002, the SEC approved five mutual fund management
companies to establish and manage foreign investment funds (FIFs) at a
level of US $200m per year. Investors are permitted to invest in overseas
securities via FIFs.
To summarize, Korea and Singapore have completely liberalized the
entry of foreign-based funds. China allows foreign-based investment
management companies to enter the domestic market in the form of
joint ventures, with foreign ownership capped at 49 %. Foreign-based
fund managers are allowed to enter the market in Malaysia with the
Securities Commissions approval. In the Philippines, the authorities are
working on legislation that will allow foreign funds to be listed in the
domestic markets.
Investment funds in the region face various restrictions on asset allocation in foreign securities, which severely restricts competition in the
fund management industry as well as opportunities for portfolio diversification. Again, Korea and Singapore have removed all such restrictions.
Other countries, however, impose caps on the percentage of assets that
can be invested in overseas markets. In Indonesia, funds are allowed to
invest less than 15 % of their net assets abroad. In Malaysia, the limit is
30 %. In the Philippines the limit is 20 % and the funds must seek prior

Asset Management

117

approval from the central bank in order to invest in offshore markets.


Finally, in Thailand the funds can invest up to US $200 million each year.

Case Study ofHDFC AMC, India

HDFC AMC Ltd was incorporated under the Companies Act 1956, on
December 10, 1999, and was approved to act as an AMC for the HDFC
Mutual Fund by SEBI in its letter dated July 3, 2000. The registered office
of the AMC is situated at HUL House, 2nd Floor, H.T. Parekh Marg,
165166, Backbay Reclamation, Churchgate, Mumbai, 400 020. The
Company Identification Number(CIN) is U65991MH1999PLC123027.
In terms of the Investment Management Agreement, the trustee has
appointed the HDFC Asset Management Company Limited to manage
the mutual fund. The paid up capital of the AMC is Rs. 25.241 crore as
at March 31, 2015.
HDFC AMC and HDFC Trustee Company Limited (HDFC Trustee),
the asset management company and trustee company of HDFC Mutual
Fund (HDFC MF) respectively, entered into an agreement with Morgan
Stanley Investment Management Private Limited (MS AMC) and the
Board of Trustees of Morgan Stanley Mutual Fund (the MS Trustees),
the asset management company and trustees of Morgan Stanley Mutual
Fund (MSMF), pursuant to which the schemes of MSMF (MSMF
Schemes) were transferred to and formed part of HDFC MF, HDFC
Trustee took over the trusteeship of the MSMF Schemes from the MS
Trustees and HDFC AMC took over the rights to manage the MSMF
Schemes from MS AMC, and became the investment manager of the
MSMF Schemes (the Transaction).

4.1

Changes totheMSMF Schemes

Pursuant to the acquisition of schemes, to avoid similar products being


offered to the investors, the following changes were made to the Schemes
of MSMF and HDFC MF (see Table 5.2)
Plan A was renamed HDFC Dynamic PE Ratio Fund of Funds and
Plan B was merged into it.

118

The Management of Mutual Funds

Table 5.2 Changes to the MSMF Schemes


Current name and type of
scheme/transferor scheme
Morgan Stanley Growth
Fund (Open Ended Equity
Fund)
Morgan Stanley A.C.E Fund
(Open Ended Across
Capitalizations Equity
Fund)
Morgan Stanley Gilt Fund
(Open Ended Gilt Fund)

Morgan Stanley Liquid Fund


(Open Ended Liquid Fund)
Morgan Stanley Ultra Short
Term Bond Fund (Open
Ended Debt Fund)
Morgan Stanley Active
Bond Fund (Open Ended
Debt Fund)
Morgan Stanley Short Term
Bond Fund (Open Ended
Debt Fund)
Morgan Stanley Multi
Asset Fund(Plan A and
Plan B) (Open Ended
Debt Fund)
HDFC Focused Large-Cap
Fund (Open Ended Equity
Scheme)

Type of change
Change in Name
and Fundamental
Attributes
Change in Name
and
Fundamental
Attributes
Change in Name
and
Fundamental
Attributes
Merger
Merger

Merger

Merger

Change in Name
and
Fundamental
Attributes
Merger

Proposed new name and type


of scheme/transferee scheme
HDFC Large Cap Fund
(Open-ended equity
scheme)
HDFC Small and Midcap Fund
(Open-ended equity
scheme)
HHDFC Ination Indexed
Bond Fund(Open-ended
income scheme)
HDFC Liquid Fund (Openended liquid income scheme)
HDFC Cash Management
FundTreasury Advantage
Plan (Open-ended income
scheme)
HDFC High Interest Fund
Dynamic Plan (Open-ended
income scheme)
HDFC Short Term Plana
(Open-ended income
scheme)
HDFC Dynamic PE Ratio Fund
of Fundsb (Open-ended fund
of funds scheme)
HDFC Equity Fund (Openended equity scheme)

a
HDFC Short Term Plan underwent a change in fundamental attributes after the
close of business hours on June 20, 2014
b
As part of the change in the fundamental attributes of Morgan Stanley Multi
Asset Fund (Plan A and Plan B)

4.2

Risk Management at HDFC AMC Limited

HDFC AMC Ltd has a very strong focus on risk control for the investments made in different asset classes, either equity or debt. A full-time
dedicated risk manager is in place to monitor the templates set up for risk

Asset Management

119

management. Risk control plays a major role in terms of maintaining the


investment process in line with the fund objective, having control over
the concentrated limits set in for a fund manager for a particular fund
and holdings percentage in each of the stocks, and maintaining the cash/
liquidity position in a particular fund. These are the major issues relating
to risk control and risk management:
Risk control areas:
Monitoring adherence to scheme templates, wherein all the schemes
are set with different investment control under which the fund manager has to operate. No deviation can be made in order to achieve the
fund objective and deliver what the fund has promised. To take control of this, regular monitoring is undertaken for every scheme.
Monitoring concentrations/aggregate exposures.
Tracking deviations from benchmark indices. All the indexed funds
which normally have to move with the index are monitored, to minimize tracking error in the portfolio.
Monitoring scheme liquidity. This focuses on assets movement into a
fund, wherein effective ways of deploying fresh funds have to be analyzed and the selling of stocks has to be monitored for redemptions
from the fund.
Monitoring adherence to documented processes.
Attribution analysis.
Analyzing all the risk ratios so as to get a clear picture of the working
of the control measures and fund management.

4.3

Fund Templates: Risk Control Measure

There are different templates for each fund, and each template spells out
the following unambiguously.
The funds positioning, based on investing, growth vs. value, cap-based
investment. All these are taken in to consideration.
The investment objectives.
asset allocations.
investment limits.

120

The Management of Mutual Funds

dos and donts of investing, which have to be strictly adhered to.


benchmark index.
The risk manager regularly monitors adherence to the templates and
the tracking of deviations. The investment management process may be
summarized as follows:
Practice fundamental long-term investing where the focus will be predominantly on Price Earning (PE) vs. growth of the company as over
the long run PE of a company has to move with the earnings growth
rate of a company (Table 5.3).
This concept of investing proves to be right for a long-term investment.
Buy sustainable, reasonable quality (that one understands) and in
growing businesses at reasonable valuations.
Remain diversified across sectors and across caps to have wide opportunities and maintain product sanctity (Table 5.4).

Prole ofStandard Life Investments


Limited

The Standard Life Assurance Company was established in 1825 and has
considerable experience in global financial markets. In 1998, Standard
Life Investments Limited became the dedicated investment management company of Standard Life Group, owned 100 % by the Standard
Life Assurance Company. With global assets under management of
approximately US $186.45 billion as of March 31, 2005, Standard Life
Investments Limited is one of the worlds major investment companies
Table 5.3 PEG ModelDerived by Peter Lynch
Company

PE

Growth

PEG Ratio

Decision

A
B
C

20
20
20

40
20
10

0.5
1
2

Under ValuedBuy
Fairly ValuedHold
Over ValuedSell

Asset Management

121

Table 5.4 Product positioning

HDFC Cash
ManagementFund
Call Plan
HDFC Cash
ManagementFund
Regular Plan
HDFC Liquid Fund

HDFC STP
HDFC High Interest STP
HDFC Income Fund
HDFC High Interest
Fund

HDFC Cash
ManagementFund
Call Plan
HDFC Cash
ManagementFund
Regular Plan
HDFC Liquid Fund

Portfolio
maturity

Features

Inv. Period

15 days

T+0 redemption/Daily
Dividend

17 days

120180
days

T+1 redemption/Daily
Dividend

715 days

60120 days

T+1 redemption/
Weekly Dividend

115 days

Credit risk

Interest rate risk

Load

Low
Moderate
Low
Moderate

Low
Low to Moderate
Medium
Medium

15 days
30 days
90 days
No Load

Portfolio
maturity

Features

Inv. Period

15 days

T+0 redemption/Daily
Dividend

17 days

120180
days

T+1 redemption/Daily
Dividend

715 days

60120 days

T+1 redemption/Weekly
Dividend

115 days

and is responsible for investing money on behalf of 5 million retail and


institutional clients worldwide. With its headquarters in Edinburgh,
Standard Life Investments Limited has an extensive and developing
global presence with operations in the UK, Ireland, Canada, USA,
China, Korea and Hong Kong. In order to meet the different needs and
risk profiles of its clients, Standard Life Investments Limited manages a
diverse portfolio covering all the major markets worldwide, including a
range of private and public equities, government and company bonds,
property investments and various derivative instruments. The companys
current holdings in UK equities account for approximately 2 % of the
market capitalization of the London Stock Exchange.

122

5.1

The Management of Mutual Funds

Investment Management Process at Standard


Chartered AMC Pvt Ltd.

Standard Chartered Mutual Fund is a relatively new entrant into the


management of equity assets in India, but it has been managing debt
assets since 2000 when it took over Grindlays Mutual Fund. Let us
look at the process of investing in both equity and debt. Equity Circle
(Appendix-3) is the process adopted by Standard Chartered AMC for
investing in equities. The model of investing has been categorized into
three major groups:
Business
Valuation
Market interest
Business basically looks at industry analysis wherein all the industries
are analyzed based on their growth potential, proposed capital expenditure and other political factors, all of which would have an influence on
the industrys earnings. After selecting the industry where growth prospects are highest, the next step would be to look at the market leaders in
that particular industry and their return on investment from the business, along with which the management of the company is also analyzed
in order to shortlist a set of industries and companies where investment
can be made. The next stage of the process is to look at the valuations of
the businesses shortlisted. Various valuation methods are used to arrive at
the intrinsic value of the stock.

PE vs. growth
Sector/market PE
Discounted Cash Flow (DCF) vs. Enterprise value
Economic value addition (EVA)

Using the above-mentioned methods of analysis, the undervalued


stocks are indicated.
A company might have very good business and the stock might be
undervalued compared to its intrinsic value, but the basic reason for the
stock being undervalued is a lack of market interest. In turn, to analyze

Asset Management

123

the issue of market interest, equity circle aspects are looked into as they
drive this.
Free float
Institutional interest
Research coverage
These concepts help the company to arrive at its price performance,
which is nothing but the concept of a company growing with the earnings growth rate. The so-called 3D process is used for managing debt
assets at Standard Chartered Mutual Fund. It looks at the factors that
influence investment in debt assets in three broad categories, each of
those factors being influenced by sub-factors.
Economic fundamentals
Market psychology
Market valuations.
These three aspects look at each of the macro aspects that influence the
interest rate movement and the liquidity position in the market. Based
on analyzing all these factors, a fund is managed by moving the maturity
of the portfolio, and the credit risk is thereby managed.
Fixed Income Investments HDFC MF also has a different process for
investments in Fixed Income Securities. The following are the broader
processes used for debt fund management.
Emphasis on risk adjusted return (RAR) for all the fixed income
portfolios.
Consistent investments in the highest credit quality securities for all
portfolios.
Portfolio risk contained through a mix of low credit/liquidity risk and
active management of interest rate risk.
Positioning in instrument/maturity buckets that provide highest relative value.
Clear product differentiation for various products spread across the
yield curve.

124

The Management of Mutual Funds

This is the kind of process adopted by HDFC MF for managing all


debt money with active management of duration, by managing the
average maturity of a portfolio with the interest rate movements in the
market.

Asset ManagementSelect Schemes

The following tables indicate the asset management status of select


schemes in India. The data show a clear picture of the sectoral allocation
of these funds.
Table 5.5. Asset managementUTI Equity Fund
Table 5.6. Asset managementSBI Blue Chip FundDirect Plan (G)
Table 5.7. HDFC Index FundSensex Plus PlanDirect Plan
Table 5.5 Asset managementUTI Equity Fund
Sector allocation (Oct 30, 2015)
1-Year
Sector

High

Low

Banking/Finance
Automotive
Technology
Oil & Gas
Pharmaceuticals
Cement

21.20
14.17
10.91
7.34
7.23
6.89

23.85
15.86
12.64
8.14
9.49
7.57

20.83
14.63
11.06
7.37
7.46
6.59

Table 5.6. Asset managementSBI Blue Chip FundDirect Plan (G)


Sector allocation (Dec 31, 2015)
1-Year
Sector

High

Low

Banking/Finance
Pharmaceuticals
Automotive
Engineering
Technology
Oil & Gas

19.74
11.85
10.05
8.32
7.50
6.00

25.60
11.93
11.95
9.56
14.51
7.06

20.69
9.30
10.07
6.89
6.57
1.95

Asset Management

Table 5.8. HDFC TOP 200 Fund (G)


Table 5.9. Birla Sun Life Frontline Equity Fund (G)
Table 5.10. J.P.Morgan India Equity Fund (G)
Table 5.11. Kotak 50Regular Plan (G)
Table 5.12. IDBI India Top 100 Equity Fund (G)
Table 5.7 HDFC Index FundSensex Plus PlanDirect Plan
Sector allocation (Nov 30, 2015)
1-Year
Sector

High

Low

Banking/Finance
Technology
Automotive
Oil & Gas
Tobacco
Pharmaceuticals

26.84
14.61
10.60
9.01
7.22
6.38

30.33
14.72
10.60
11.79
7.22
7.50

26.84
12.86
9.24
9.01
6.06
5.46

Table 5.8 HDFC Top 200 Fund (G)


Sector allocation (Nov 30, 2015)
1-Year
Sector

High

Low

Banking/Finance
Technology
Engineering
Automotive
Oil & Gas
Utilities

35.12
12.13
10.26
9.35
8.58
4.23

35.73
13.75
11.13
9.60
10.59
4.23

33.01
10.41
9.17
8.03
8.55
2.66

Table 5.9 Birla Sun Life Frontline Equity Fund (G)


Sector allocation (Nov 30, 2015)
1-Year
Sector

High

Low

Banking/Finance
Technology
Automotive
Engineering
Oil & Gas
Pharmaceuticals

29.89
12.12
8.79
8.03
7.69
6.68

34.01
12.32
11.05
8.45
7.69
7.98

29.89
10.50
8.79
6.84
5.59
5.51

125

126

The Management of Mutual Funds

Table 5.10 J.P.Morgan India Equity Fund (G)


Sector allocation (Dec 31, 2015)
1-Year
Sector

High

Low

Banking/Finance
Technology
Automotive
Engineering
Pharmaceuticals
Cement

26.67
11.52
11.09
11.04
7.41
7.28

35.14
11.52
13.68
14.40
7.61
7.28

26.67
7.56
11.09
10.67
4.83
4.84

Table 5.11 Kotak 50Regular Plan (G)


Sector allocation (Dec 31, 2015)
1-Year
Sector

High

Low

Banking/Finance
Technology
Automotive
Engineering
Cement
Oil & Gas

26.81
15.26
12.37
7.60
7.06
6.80

32.00
16.78
13.07
8.44
7.91
6.80

23.85
13.19
10.57
6.37
6.40
4.44

Table 5.12 IDBI India Top 100 Equity Fund (G)


Sector allocation (Dec 31, 2015)
1-Year
Sector

High

Low

Banking/Finance
Automotive
Engineering
Pharmaceuticals
Technology
Cons NonDurable

24.59
19.97
7.41
6.51
5.28
4.97

27.20
20.62
10.04
12.13
8.20
5.40

20.21
15.57
7.41
6.51
5.28
3.54

Asset Management

127

Sectoral Allocation Pattern: ASelect


Schemes Study inIndia

Table 5.5 depicts asset management and sectoral allocation of UTI Equity
Fund on October 30, 2015. It may be observed that the banking sector
has been given top priority with 21.20 % and least priority is given to the
cement industry, with 6.89 % of allocation of assets.
Table 5.6 depicts SBI Blue Chip FundDirect Plan (Growth Option).
This fund allocates 19.74 % to the banking and finance sector followed
by the pharmaceutical industry with 11.85 %.
Table 5.7 gives a clear picture of the allocation of funds by HDFC
Index FundSensex PlanDirect Plan. In this scheme the banking and
finance sector got top priority with 26.84 % allocation of funds, followed
by the technology sector with 14.61 %.
Table 5.8 indicates asset allocation by HDFC Top 200 Fund
(Growth). This scheme also allocates highest funds to the banking and
finance sector (35.12 %) and least priority is given to the utilities sector
(4.23 %).
Table 5.9 is allotted for Birla Sunlife Frontline Equity Fund (G). In
this scheme top priority is given to the banking and finance sector with
29.89 %. The same pattern is followed by J.P.Morgan India Equity Fund
(G) (see Table 5.10). The allocation to the banking and finance sector is
26.67 % and least priority is given to the cement industry with 7.28 %
allocation by the fund manager.
Table 5.11 indicates the fund allocation for Kotak 50Regular Plan
(G). This scheme invests 26.81 % funds in the banking and finance sector followed by the technology sector with 15.26 %.
Table 5.12 focuses on the sectoral allocation of the IDBI India Top
100 Equity Fund (G) scheme. This scheme also allots a major share to the
banking and finance sector with 24.59 %, followed by the automotive
sector with 19.97 %.

128

The Management of Mutual Funds

Summary

In this chapter we have analyzed various asset management aspects across


the world. The assets accumulated by mutual fund organizations are
being looked after by AMCs. These assets have to be deployed in the
market to gain returns, which are passed on to investors. As competition
in the industry stiffens, there is a huge amount of pressure on fund managers to beat their competitors and their benchmarks. Managing huge
amounts of money is a very difficult task. We have taken selected mutual
fund schemes in India, and their allocation pattern across various sectors
such as banking, finance, technology, pharmaceuticals, automotive and
utilities. We can summarize that most of the AMCs are investing in the
banking and finance sector as their first choice, with second preference
being given to the technology sector, because good yields are expected
from these investments.

Appendix 1 Management ofHDFC Asset


Management Company Limited
Analyst
Dhawal Metha
E A Sundaram
Pankaj Chopra
Prashant Jain
Rajesh Pherwani
Shiv Diwan
Srinivas Rao
Tushar Pradhan

Sector
Metals, Media and Hotels
FMCG, Retail
Sugar
Banking
Oil, Gas, Chemicals and Fertilizers
Cements, Textiles and Ceramics
Capital Goods, Auto and Ancilliaries
IT and Telecom

Asset Management

Appendix 2 Equity Circle: Equity Investment


Process ofSCMF
Step 1:

Idea Generation Stage

Step 2:

Macro Themes

Stock Filters

BVM Model

Business

Great Business

Valuations

Market Interest

Undervalued

Price Performance

Stock
Step 3:

Risk Control and Portfolio Construction

129

2012
58.8
47.1
0.8
0.4
0.7
52.3
50.3
5.7
2.2
1.6
2012
301.8
264.7
28.7
4.5
4
1,016.90
562.4
343.9
52.2
58.4

2011
15.9
13.6
2.6
1
0.8
46.2
4.6
23.7
7
10.9
2011
183.3
157.3
20
3
2.9
774.1
416.4
262.6
40.1
55

Source: International Monetary fund, April, 2015

Bonds
Global
Asia
Europe/Middle East/Africa
Latin America
Equities
Global
Asia
Europe/Middle East/Africa
Latin America

Bonds
Global
Asia
Europe/Middle East/Africa
Latin America
Equities
Global
Asia
Europe/Middle East/Africa
Latin America
Net asset values

Net ows

(Billions of US dollars)

2013
326.2
265.5
30.3
6
24.5
1,071.20
580.1
385.1
55.3
50.7

2013
25.2
19.5
2.5
0.5
3.7
26.7
10.1
17.2
7.7
11.9
2014
362.7
258.4
80.6
5
18.7
1,130.80
569.7
481
43.1
37

2014
11.7
6.3
0.2
1.1
4.5
28.5
8.9
6.1
5.7
7.9

Appendix 3 Emerging Markets: Mutual Funds

2014
Q1
18.4
14.8
2.7
0.2
0.6
42.9
21.9
15.3
1.9
3.7
2014
Q1
319.6
260.3
28.7
6.1
24.4
1,027.40
559.3
369.9
52.1
46.1

2014
Q2
12.4
15.9
0.8
0.1
2.5
13.4
16.1
1.4
0.6
0.7
2014
Q2
348.5
288.5
30.5
6.3
23.2
1,117.80
618.6
394.9
55.2
49.1

2014
Q3
1.5
2.5
0.3
0.4
1
26.3
13.4
14.9
1.2
0.9
2014
Q3
364
278.8
59
5.5
20.8
1,159.50
607.8
456.5
49.8
45.4

2014
Q4
7.2
9.9
3.4
0.3
0.4
25.3
16.4
4.3
1.9
2.6
2014
Q4
362.7
258.4
80.6
5
18.7
1,130.80
569.7
481
43.1
37

130
The Management of Mutual Funds

Asset Management

Appendix 4 List oftheAsset Management


Companies, India
Name of the AMC
Alliance Capital Asset Management (I) Private Limited
Birla Sun Life Asset Management Company Limited
Bank of Baroda Asset Management Company Limited
Bank of India Asset Management Company Limited
Canbank Investment Management Services Limited
Cholamandalam Cazenove Asset Management Company
Limited
Dundee Asset Management Company Limited
DSP Merrill Lynch Asset Management Company Limited
Escorts Asset Management Limited
First India Asset Management Limited
GIC Asset Management Company Limited
IDBI Investment Management Company Limited
Indfund Management Limited
ING Investment Asset Management Company Private
Limited
J M Capital Management Limited
Jardine Fleming (I) Asset Management Limited
Kotak Mahindra Asset Management Company Limited
Kothari Pioneer Asset Management Company Limited
Jeevan Bima Sahayog Asset Management Company
Limited
Morgan Stanley Asset Management Company Private
Limited
Punjab National Bank Asset Management Company
Limited
Reliance Capital Asset Management Company Limited
State Bank of India Funds Management Limited
Shriram Asset Management Company Limited
Sun F and C Asset Management (I) Private Limited
Sundaram Newton Asset Management Company Limited
Tata Asset Management Company Limited
Credit Capital Asset Management Company Limited
Templeton Asset Management (India) Private Limited
Unit Trust of India
Zurich Asset Management Company (I) Limited

Nature of
ownership
Private foreign
Private Indian
Banks
Banks
Banks
Private foreign
Private foreign
Private foreign
Private Indian
Private Indian
Institutions
Institutions
Banks
Private foreign
Private Indian
Private foreign
Private Indian
Private Indian
Institutions
Private foreign
Banks
Private Indian
Banks
Private Indian
Private foreign
Private foreign
Private Indian
Private Indian
Private foreign
Institutions
Private foreign

131

6
Portfolio Management

Introduction

Portfolio management refers to the process of selecting various avenues


of investment for a better yield on investment. Individual investors invest
in mutual funds with a view to achieving good returns. Hence, the fund
manager should act according to market fluctuations while selecting the
portfolio of the respective fund/scheme.
This chapter focuses on portfolio management in mutual fund
schemes. A select comparative study will clarify the aspects of portfolio
management that relate to mutual fund schemes. One study, Arnold etal.
(2000),1 examines risk-adjusted returns, using Sharpes Index, Treynors
Index and Jensens Alpha, for five portfolios of international mutual
funds during 19851994. Similarly, Yoon K.Choi (2006) proposed an
incentive-compatible portfolio performance evaluation measure.2 In this
Arnold L Redmand, NS Gullett and Herman Manakyan (2000), The Performance of Global and
International Mutual Funds, Journal of Financial and strategic Decisions, Vol. 13, No. 1, Spring,
7585.
2
Yoon K Choi, (2006) Relative Portfolio Performance Evaluation and Incentive Structure, Journal
of Business, Vol. 79, No. 2, 90321.
1

The Author(s) 2017


G.V.S. Sekhar, The Management of Mutual Funds,
DOI10.1007/978-3-319-34000-5_6

133

134

The Management of Mutual Funds

model, a risk-averse portfolio manager is delegated to manage a fund, and


his portfolio construction effort is not directly observable to investors.
Eleni Thanous results (2008) indicated that the majority of the funds
under examination closely followed the market, achieved overall satisfactory diversification and some consistently outperformed the market,
while the results in market timing were mixed, with most funds displaying negative market timing capabilities.3 A study by Mohit Gupta and
Agarwal (2009) focused on the portfolio creation and industry concentration of 18 equity-linked savings schemes.4 Mutual fund industry concentration was the variable used in classification, or cluster creation.
Redman et al. examined the risk-adjusted returns of international
mutual funds over three time periods: 19851994, 19851989 and
19901994.5 Sharpes Index, Treynors Index and Jensens Alpha were
computed for five portfolios of global mutual funds: world, foreign,
Europe, Pacific and international. The performance of the five portfolios
was compared to that of a proxy for the stock market (the Vanguard
Index 500 mutual fund) and a portfolio composed of mutual funds that
invest in US issued stocks (domestic mutual funds).
During the 19851994 period, the portfolios of global funds generally
earned risk adjusted returns superior to that of the US stock market and
the portfolio of domestic mutual funds under the Sharpe and Treynor
indices. The exception was the Europe portfolio of funds, which had a
Sharpes Index below that of both the domestic fund portfolio and the
US stock market. The Jensens Alphas were generally positive (domestic portfolio of funds was negative), but not significantly different from
zero during 19851994. The R2s for the Jensen regressions were generally below 60 %, indicating that excess returns in the US stock market
explained a small proportion of the excess returns of the global portfolios
of funds. Consequently, there is the potential for benefits through diverEleni Thanou (2008), Mutual Fund Evaluation During Up and Down Market Conditions: The
Case of Greek Equity Mutual Funds, International Research Journal of Finance and Economics,
Issue 13.
4
Mohit Gupta and Navdeep Aggarwal (2009), Mutual Fund Portfolio Creation using Industry
Concentration, The ICFAI Journal of Management Research, Vol. Viii, No. 3, 2009, 720.
5
Arnold L.Redman, N.S.Gullet and Herman Mankyan (2000), The Performance of Global and
International Mutual Funds, Journal of Financial and Strategic Decisions, 13(1), pp7585
3

6 Portfolio Management

135

sification for investors by adding global mutual funds to their portfolios.


For 19851989, all of the international portfolios outperformed both
the US stock market and domestic mutual funds according to Sharpes
and Treynors indices. As a group, the international funds had a Jensens
Alpha that was significant and positively indicating superior risk-adjusted
returns relative to the stock market.
Specifically, the portfolio of Pacific region mutual funds had an Alpha
that was positive, statistically significant and substantially larger than
those of the other portfolios. The R2 for the period was significant at the
1 % level and below 1.00, revealing the potential diversification benefits
of including global funds in a portfolio of domestic mutual funds.
For the period 19901994, the risk-adjusted returns of global portfolios were lower than those of the domestic fund portfolio and the stock
market under Sharpes and Treynors indices, except for the Pacific portfolio, which had a Treynors Index above both the Vanguard and domestic
portfolio. The domestic fund portfolio had greater Sharpes and Treynors
indices and outperformed the US stock market. However, the Jensens
Alphas were negative for all of the global portfolios, while the Alpha for
the domestic portfolio was small and positive. Similarly to the longer
time period, the Alpha was not statistically significant.
This chapter focuses on the following issues:
Portfolio management myths
Overview of selected equity oriented schemes in India
Portfolio management and analysis of select schemes in India.

1.1

Portfolio Management Myths

(a) Risk-free is assumed as constant return: There are several studies


which evidence that risk-free is not constant and is dependent upon
the market conditions. Sharpes Index (1964) is based on both capital
asset prices and market conditions with the help of risk and return
probabilities.6
Sharpe, William F (1964), Capital Asset Prices: A Theory of Market Equilibrium under conditions of Risk, Journal of Finance, 19: Sept, pp22542.
6

136

The Management of Mutual Funds

Sp =

E ( Rp ) Rf

( Rp )

E(Rp): denotes the expected return of the portfolio


Rf: denotes the return on the risk-free asset
(Rp): denotes the standard deviation of portfolio return.
(b) Beta coefficient is better than alpha coefficient: There are contradicting studies relating to alpha and beta coefficients; researchers
have diverse opinions regarding whether one should consider total
risk or market risk in order to estimate the efficiency of a mutual
fund. Treynor (1965) advocated the use of beta coefficient instead of
total risk.7
Tp =

E ( Rp ) Rf

E(Rp): denotes the expected return of the portfolio


Rf: denotes the return on the risk-free asset
p: denotes the beta of portfolio return.
(c) Estimating market timing ability is easy: Treynor and Mazuy
(1966) used the investment performance outcomes of 57 investment
managers to find evidence of market timing abilities, and found no
statistical evidence that the investment managers of any of the sample
funds had successfully predicted the market.8 Treynor and Mazuy
developed a prudent and exclusive model in order to measure investment managers market timing abilities. This formulation is obtained
by adding squared extra return in the excess return version of the
capital asset pricing model, as given below:

Treynor, Jack L (1965), How to rate management of investment funds, Harvard Business
Review, Vol.43, pp6375.
8
Treynor, Jack L and Mazuy, Kay K (1966), Can Mutual Funds Outguess the Markets, Harvard
Business Review, 44: 13136.
7

6 Portfolio Management

(R

R ft ) = + p ( Rmt R ft ) + yp ( Rmt R ft ) e pt

137

2+

pt

Rpt: denotes monthly return on the fund


Rft: denotes monthly return on 91 day treasury bills
Rmt: denotes monthly return on market index
Ept: denotes error term.
This model involves running a regression with excess investment
return as dependent variable and the excess market return and squared
excess market return as independent variables. The value of coefficient of squared excess return acts as a measure of market timing
abilities that has been tested for significance of using t-test. Significant
and positive values provide evidence in support of the investment
managers successful market timing abilities.
(d) Expected return is equal to the risk free rate plus a risk premium:
Michael C.Jensen (1967) finds that some funds are unable to predict
security prices well enough to outperform a buy the market and hold
policy.9 Jensens model states that, given the additional assumption
that the capital market is in equilibrium, all three models yield the
following expression for the expected one period return on any security (or portfolio) j:

E ( R j ) = RF + J E ( Rm ) RF

RF=the one-period risk-free interest rate.


J=cov(jRJ,RM)/2RM=the measure of risk (hereafter called systematic risk), which the asset pricing model implies is crucial in determining the prices of risky assets.
E(RM)=the expected one-period return on the market portfolio,
which consists of an investment in each asset in the market in proportion to its fraction of the total value of all assets in the market. It
implies that the expected return on any asset is equal to the risk-free
Michel C Jensen (1967), The Performance of Mutual Funds in the Period 1945-64, Journal of
Finance, Vol. No. 23, No.2, pp389416.
9

138

The Management of Mutual Funds

rate plus a risk premium given by the product of the systematic risk
of the asset and the risk premium on the market portfolio.
(e) Overall performance can be attributed to selectivity and risk:
Fama (1972) devised a mechanism for segregating part of an observed
investment return depending on managers ability to pick up the best
securities at a given level of risk, in part thanks to the prediction of
general market price movements.10 In Famas decomposition performance evaluation measure of portfolio, overall performance can be
attributed to selectivity and risk. The performance based on selectivity is decomposed into net selectivity and diversification. The difference between actual return and risk-free return indicates overall
performance:

Rp Rf

Rp: denotes return on the portfolio, which is monthly average return


of fund.
Rf: denotes monthly average return on treasury bills 91 days.
The overall performance can be bifurcated into performance based
on selectivity and risk.
Thus,

Rp Rf = Rp Rp ( p ) + Rp ( p ) Rf )

In other words, Overall performance=selectivity+risk


The Leah Modigliani and Franco Modigliani Approach,11 better
known as M2 in investment literature, is developed by adjusting portfolio return. This adjustment affects the uncommitted (cash balances)
part of the investment portfolio at the risk-less return so as to enable
all portfolio holdings to participate in the return generation process.
Fama Eugene F. (1972), Components of Investment Performance, Journal of Finance, 27:
pp55167.
11
Modigliani, Franco and Modigliani, Leah, Risk Adjusted Performance, Journal of Portfolio
Management, 1997, pp4554.
10

6 Portfolio Management

139

This adjustment is necessary in order to level out the playing field for
portfolio risk return and vis--vis market return. The effect of this
adjustment is reported below:
M 2 = *Rp Rm

* Rp = ( Rf * (1 Sdm / Sdp ) ) + ( Rp * Sdm / Sdp )

*Rp: denotes expected return


Rf: denotes risk-free return
Sdm: denotes standard deviation of market portfolio
Sdp: denotes standard deviation of managed portfolio

 verview ofaSelect Equity Oriented


O
Funds inIndia

ICICI GROWTH PLAN FUND:


This fund aims to achieve a high degree of capital appreciation through
investments in smaller and faster growing companies.
SPECIAL FEATURES:
CHOICE: Growth plan and dividend plan (re-investment and
payout option)
Dividends are tax-free for the investor.
EASY LIQUIDITY: Transactions are processed within four
working days.
FRANKLIN INDIA BLUECHIP FUND:
This fund aims to provide medium- to long-term capital appreciation.

140

The Management of Mutual Funds

Table 6.1 ICICI Growth Plan Fund


Type of scheme
Nature of scheme
Inception date
Face value (Rs./unit)
Fund size (Rs. in crore)
Minimum investment
(Rs.)
Purchase redemption
NAV calculation
Fund manager
Entry load
Exit load
Investment pattern
Options
Default option
Systematic investment
plan (SIP)
Systematic transfer
plan (STP)
Systematic withdrawal
plan (SWP)

Open ended
Equity
July 9, 1998
10
332.88 crore
Rs. 5,000
Daily
Daily
Devensangoi
2.25 %
Nil
Equity and equity-related instruments up to 95 % and
debt, money market and cash up to 5 %
Growth and dividend
Dividend re-investment
Monthly : Minimum Rs. 1,000+5 post-dated
checks for a minimum of Rs. 1,000 each.
Available
Minimum of Rs. 500 and multiples of Rs. 1

SPECIAL FEATURES:
CHOICE: Growth plan and dividend plan (re-investment &
Payout option)
Dividends are tax-free for the investor.
EASY LIQUIDITY: Transactions are processed within four
working days.
UTI MASTERSHARE FUND:
This is an open-ended equity fund aiming to provide benefit of capital
appreciation and income distribution through investment in equity shares.
SPECIAL FEATURES:
CHOICE: Growth plan and dividend plan (re-investment and
payout option)
Dividends are tax-free for the investor.
EASY LIQUIDITY: Transactions are processed within four
working days.

6 Portfolio Management

141

Table 6.2 Franklin India Bluechip Fund


Type of scheme
Nature of scheme
Inception date
Face value (Rs./unit)
Fund size (Rs. in crore)
Minimum investment(Rs)
Purchase/redemption
NAV calculation
Fund manager
Entry load
Exit load
Investment pattern
Options
Default option
Systematic investment plan
(SIP)
Systematic transfer plan
(STP)
Systematic withdrawal plan
(SWP)

Open ended
Equity
December 1, 1993
10
2023.88 crore
Rs. 5,000
Daily
Daily
K.N.SIVASUBRAMANIAN
2.25 %
Nil

Growth and dividend


Dividend re-investment
Monthly: Minimum Rs. 1,000+5 post-dated
checks for a minimum of Rs. 1,000 each
Available
Minimum of Rs. 500 and multiples of Rs. 1

Table 6.3 UTI Mastershare Fund


Type of scheme
Nature of scheme
Inception date
Face value (Rs./unit)
Fund size (Rs. in crore)
Minimum investment
(Rs.)
Purchase redemption
NAV calculation
Fund manager
Entry load
Exit load
Investment pattern
Options
Default option
Systematic investment
plan (SIP)
Systematic transfer
plan (STP)
Systematic withdrawal
plan (SWP)

Open ended
Equity
September 19, 1986
10
1,596.40 crore
Rs. 5,000
Daily
Daily
Mr. Chandraprakashpadiyar
2.25 %
Nil
Equity minimum 70 %
Debt maximum 30 %
Growth and dividend
Dividend re-investment
Monthly: Minimum Rs. 1,000+5 post-dated checks for
a minimum of Rs. 1,000 each
Available
Available

142

The Management of Mutual Funds

BIRLA ADVANTAGE FUND:


OBJECTIVE
This fund aims to achieve a long-term growth of capital at relatively
moderate levels of risk through a diversified research-based investment
approach.
SPECIAL FEATURES:
CHOICE: Growth plan and dividend plan (re-investment and
payout option)
Dividends are tax-free for the investor.
EASY LIQUIDITY: Transactions are processed within four
working days.
Table 6.4 Birla Advantage Fund
Type of scheme
Nature of scheme
Inception date
Face value (Rs./unit)
Fund size (Rs. in crore)
Minimum investment(Rs.)
Purchase redemption
NAV calculation
Fund manager
Entry load
Exit load
Investment pattern
Options
Default option
Systematic investment plan (SIP)
Systematic transfer plan (STP)
Systematic withdrawal plan
(SWP)

Open ended
Equity
February 24, 1995
10
422.89 crore
Rs. 5,000
Daily
Daily
Mahesh Patil
2.25 %
Nil

Growth and dividend


Dividend re-investment
Monthly: Minimum Rs. 1,000+5 post-dated
checks for a minimum of Rs. 1,000 each
Available
Available

Table 6.5 Overall performance of the funds


PRU ICICI
FRANKLIN
TEMPLETON
UTI
BIRLA

S.D

BETA

SHARPE

TREYNOR

JENSEN

8.2199
7.90873

0.9369
1.02055

0.1861
0.1613

1.6332
1.2501

0.2072
0.6178

7.2350
7.9636

0.9145
0.9138

0.0439
0.0555

0.3471
0.4832

2.0138
1.2536

143

6 Portfolio Management
Table 6.6 Ranking of select funds
PRU ICICI
FRANKLIN TEMPLETON
UTI
BIRLA

S.D

BETA

SHARPE

TREYNOR

JENSEN

V
III
I
IV

IV
V
II
I

II
III
V
IV

II
III
V
IV

II
III
V
IV

INTERPRETATION: From the above analysis the funds can be


ranked as below:
The standard deviation of the KOTAK 30 Fund, when compared with
other funds, is low. It shows that it has low volatility.
The beta (i.e. the risk) is 0.9315, which is moderate compared with the
other funds.
The Jensen Ratio is also higher than the other funds (i.e. 0.1148). So
the actual performance of the fund matches the expected performance
of the fund. Moreover, the funds risk-adjusted performance is better
when compared to other funds.

 ortfolio Management andAnalysis


P
ofSelect Schemes

This section deals with portfolio management and analysis of the following select schemes in India: UTI Equity Fund (Table 6.7), SBI Blue Chip
FundDirect Plan (G)(Table 6.8), Birla Sunlife Front Line Equity Funds
(G) (Table 6.9), SBI Magnum Equity Fund (G) (Table 6.10), HDFC
Index Fund Sensex Plus PlanDirect Plan (Table 6.11), HDFC Top fund
(G) (Table 6.12), J.P.Morgan India Equity Fund (G) (Table 6.13) Kotak
50 Regular Plan (G) (Table 6.14), IDBI India Top 100 Equity Fund (G)
(Table 6.15), ICICI Prudential Top Fund (G) (Table 6.16).
Table 6.7 depicts the portfolio management of UTI Equity Fund. It is
observed that 6.1 % of the total fund value of Rs.281.9 crore, invested in
HDFC Bank, can be considered as top holding of the portfolio, followed
by investment in Infosys with 5.02 %, and its value is Rs.232.15 crore of
UTI Equity Fund.

144

The Management of Mutual Funds

Table 6.7 UTI Equity Fund


Portfolio management UYI Equity Fund
Top holdings (Oct 30, 2015)
Equity

Sector

Value

Asset %

(Rscr)
HDFC Bank
Infosys
TCS
Reliance
Shree Cements
ICICI Bank
Sun Pharma
Maruti Suzuki
Axis Bank
Bharti Airtel

Banking/Finance
Technology
Technology
Oil/Gas
Cement
Banking/Finance
Pharmaceuticals
Automotive
Banking/Finance
Telecom

281.9
232.15
167.18
165.41
152.73
151.24
122.55
94.04
90.54
88.83

6.1
5.02
3.62
3.58
3.31
3.27
2.65
2.04
1.96
1.92

Table 6.8 SBI Blue Chip Funddirect plan (G)


Top holdings (Dec 31, 2015)
Equity

Sector

Value (Rscr)

Asset %

HDFC Bank
Sun Pharma
Reliance
Infosys
Maruti Suzuki
TCS
Larsen
Ramco Cements
M&M
Titan Company

Banking/Finance
Pharmaceuticals
Oil/Gas
Technology
Automotive
Technology
Engineering
Cement
Automotive
Miscellaneous

29.04
23.97
22.83
19.16
15.61
12.49
11.52
11.35
10.89
9.96

6.88
5.68
5.41
4.54
3.7
2.96
2.73
2.69
2.58
2.36

Table 6.9 Birla Sun Life Frontline Equity Fund (G)


Top holdings (Dec 31, 2015)
Equity

Sector

Value (Rscr)

Asset %

HDFC Bank
Infosys
ICICI Bank
Reliance
ITC
Axis Bank
Larsen
IndusInd Bank
Tech Mahindra

Banking/Finance
Technology
Banking/Finance
Oil/Gas
Tobacco
Banking/Finance
Engineering
Banking/Finance
Technology

637.53
528.79
446.38
431.84
377
350.14
321.4
304.92
265.84

6.2
5.14
4.34
4.2
3.66
3.4
3.12
2.96
2.58

145

6 Portfolio Management
Table 6.10 SBI Magnum Equity Fund (G)
Sector allocation (Dec 31, 2015)
Equity

Sector

1-Year

HDFC
Infosys
Tata Motors
HPCL
DIVIS Labs
coal India

Banking/Finance
Technology
Automotive
Oil/Gas
Pharmaceuticals
Metals/Mining

High

low

32.94
19.01
9.29
8.56
6.21
5.15

37.23
19.1
15.62
7.39
13.62
5.9

32.22
12.42
10.32
4.73
7.34
3.2

Table 6.11 HDFC Index Fund Sensex Plus Plan Direct Plan
Top holdings (Dec 31, 2015)
Equity

Sector

Value (Rscr)

Asset %

Infosys
HDFC Bank
ITC
HDFC
Reliance

Technology
Banking/Finance
Tobacco
Banking/Finance
Oil/Gas

9.7
9.37
8.76
8.53
7.8

7.99
7.73
7.22
7.04
6.43

Table 6.12 HDFC Top 200 Fund (G)


Top holdings (Dec 31, 2015)
Equity

Sector

Value (Rscr)

Asset %

SBI
Infosys
ICICI Bank
HDFC Bank
Larsen
Maruti Suzuki
Reliance
Tata Motors (D)
ITC

Banking/Finance
Technology
Banking/Finance
Banking/Finance
Engineering
Automotive
Oil/Gas
Automotive
Tobacco

958.38
943.22
900.53
650.09
610.12
535.68
534.18
455.76
424.46

7.49
7.37
7.03
5.08
4.77
4.18
4.17
3.56
3.32

146

The Management of Mutual Funds

Table 6.13 J.P.Morgan India Equity Fund (G)


Top holdings (Dec 31, 2015)
Equity

Sector

Value (Rscr)

Asset %

HDFC Bank
Infosys
HDFC
TCS
Reliance
Kotak Mahindra
Maruti Suzuki
ITC
IndusInd Bank
Tata Motors

Banking/Finance
Technology
Banking/Finance
Technology
Oil/Gas
Banking/Finance
Automotive
Tobacco
Banking/Finance
Automotive

41.5
28.71
24.28
18.07
14.47
13.86
13.26
13.26
12.98
12.93

8.89
6.15
5.2
3.87
3.1
2.97
2.84
2.84
2.78
2.77

Table 6.14 Kotak 50 Regular Plan (G)


Top holdings (Dec 31, 2015)
Equity

Sector

Value (Rscr)

Asset %

Infosys
HDFC Bank
ICICI Bank
Larsen
Reliance
Axis Bank
Maruti Suzuki
TCS
IndusInd Bank
Sun Pharma

Technology
Banking/Finance
Banking/Finance
Engineering
Oil/Gas
Banking/Finance
Automotive
Technology
Banking/Finance
Pharmaceuticals

84.44
77.19
57.24
43.43
40.91
39.3
35.07
32.04
31.44
28.21

8.38
7.66
5.68
4.31
4.06
3.9
3.48
3.18
3.12
2.8

Table 6.15 IDBI India Top 100 Equity Fund (G)


Top holdings (Dec 31, 2015)
Equity

Sector

Value (Rscr)

Asset %

Maruti Suzuki
HDFC Bank
IndusInd Bank
Bosch
HDFC
Kotak Mahindra
Bajaj Auto
Siemens
United Spirits
UltraTech Cement

Automotive
Banking/Finance
Banking/Finance
Automotive
Banking/Finance
Banking/Finance
Automotive
Engineering
Food/Beverage
Cement

10.38
8.74
8.69
8.37
7.95
7.74
7.72
7.53
7.51
7.48

3.94
3.32
3.3
3.18
3.02
2.94
2.93
2.86
2.85
2.8

147

6 Portfolio Management
Table 6.16 ICICI Prudential Top 100 Fund (G)
Top holdings (Dec 31, 2015)
Equity

Sector

Value (Rscr)

Asset %

Power Grid Corp


HDFC Bank
Oil India
ICICI Bank
GE Shipping
HCL Tech
Axis Bank
Tech Mahindra
Tata Motors
Reliance

Utilities
Banking/Finance
Oil/Gas
Banking/Finance
Services
Technology
Banking/Finance
Technology
Automotive
Oil/Gas

129.04
86.69
80.71
54.81
54.31
54.18
46.71
44.97
43.97
41.85

10.36
6.96
6.48
4.4
4.36
4.35
3.75
3.61
3.53
3.36

Table 6.8 indicates the portfolio management of SBI Blue Chip Fund
Direct Plan (G). It is observed that 6.88 % of total fund value of Rs.29.04
crore, invested in HDFC Bank, can be considered as the top holding of
the portfolio, followed by investment in Sun Pharma with 5.68 %, and
its value is Rs.23.97 crore of UTI equity fund. It is found that this fund
invests the least in Titan Company for a value of Rs.9.96 crore, which is
2.26 % of total investments.
Table 6.9 illustrates the Birla Sunlife Frontline Equity Fund (G). The
fund manager prefers to invest in HDFC Bank for a value of Rs.637.53
crore, which is equivalent to 6.2 % of total investments, followed by
Rs.528.79 crore (i.e. 5.14 %) in Infosys.
Table 6.10 shows details for SBI Magnum Equity Fund (G). The top
holdings in the portfolio are allocated across banking, technology, automotive, oil and gas, pharmaceuticals and metals and mining. Hence, we
can say that the fund manager has produced a balanced portfolio.
Table 6.11 indicates the portfolio allocation for HDFC _Index Fund
Sensex Plan Direct Plan. It is observed that there is a widespread allocation of investments in almost all sectors of industry, ranging from 3.14 %
in the automotive to 7.99 % in technology.
Table 6.12 shows the holdings for HDFC Top 200 Fund (G). The
fund manager invests Rs. 958.38 crore (7.49 %) in SBI as a top priority
and Rs. 371.71 crore (2.90 %) in Bank of Baroda as the lowest priority.

148

The Management of Mutual Funds

Table 6.13 depicts the portfolio management of J.P. Morgan India


Equity Fund (G). This fund manager distributes his funds among almost
all sectors of industry. However, top priority is given to the banking and
finance sector.
Table 6.14 represents the portfolio management of Kotak 50 Regular
Plan (G). The fund manager invests Rs. 84.44 crore (8.38 %) as a top
priority and Rs. 28.31 crore (2.80 %) in Sun Pharma, which has the lowest priority of all the investments.
Table 6.15 analyzes the portfolio management of IDBI India Top
100 Equity Fund (G). This fund allocates no more than 3 % on average
among various equity shareholdings in corporate entities, spread across
sectors such as automotive, banking, engineering, food and beverages.
Table 6.16 depicts the portfolio management of ICICI Prudential Top
100 Fund (G). The fund manager invests Rs. 129.04 crore (10.36 %) in
Power Grid Corporation in the utilities sector and Rs. 41.85 crore (3.36
%) in Reliance Industry in the oil and gas sector.

Summary

Portfolio management is the process of selecting various avenues of


investment for better yield on investment. Individual investors will
invest in mutual funds with the intention to make a profit. Hence, the
fund manager should act tactfully according to market fluctuations while
selecting the portfolio of the respective fund/scheme. This chapter deals
with portfolio management alongside some myths of evaluation measures regarding portfolio performance from a global perspective. We have
also examined select mutual funds in India and their sectoral allocation
along with industry concentration of respective portfolios. A good fund
manager always tries to achieve optimum returns from his portfolio.

7
Role oftheFund Manager

Introduction

A fund managers success depends on investment activity based upon


his knowledge and ability to invest the right amount, in the right type
of investment, at the right time. In the present dynamic global environment, exploring investment avenues is of great relevance. Management
style of mutual funds is developed over a period of time and is considerably influenced by experience and spadework.
A fund manager has to use his discretion, which is an art acquired both
by learning and practical experience, because all financial investments are
riskyalthough the degree of risk and return differ. Professional experts
manage mutual funds, relieving investors from the emotional stress
involved in the buying and selling of securities. The prerequisite for a
successful investment also lies in its liquidity, alongside risk and return
on investment.
The mutual fund as it is constituted at present is a twentieth-century
phenomenon. Globally, there were thousands of funds offering varied schemes with different investment objectives and options. Mutual
funds emerged as the most important investment vehicle for household
The Author(s) 2017
G.V.S. Sekhar, The Management of Mutual Funds,
DOI10.1007/978-3-319-34000-5_7

149

150

The Management of Mutual Funds

investments, with the basic objective of allowing small investors to partake in the capital market by investing in a wide portfolio of stocks so as
to reduce risk.

Empirical Studies onFund Manager Style

Lixin Huang and Jayant R.Kale state that a simple theoretical model
to demonstrate that better mutual fund managers make larger investments in the important supplier/customer industries related to the main
industry. Consistent with their theory, empirical tests on a large sample
of mutual funds show that investment in related industries is positively
associated with fund performance and plays a more significant role in
explaining fund performance than investment in the main industry.1
As Russ Wermers study reveals,2 the mutual fund returns strongly
persist over multi-year periods. Further, consumer and fund manager
behavior both play a large role in explaining these long-term continuation patternsconsumers invest heavily in last-year's winning funds,
and managers of these winners invest these inflows in momentum stocks
to continue to outperform other funds for at least two years following
the ranking year. However, managers of losing funds appear reluctant
to sell their losing stocks to finance the purchase of new momentum
stocks. Hence, momentum continues to separate winnings and losses for
a much longer period than indicated by prior studies. Even more surprising is that persistence in winning fund returns is not entirely explained
by momentum. The study finds strong evidence that flow-related buying, especially among growth-oriented funds, pushes up stock prices.
Specifically, stocks that winning funds purchase in response to persistent
flows have returns that beat their size, book-to-market, and momentum
benchmarks by two to three percent per year over a four-year period.
1

Huang, Lixin and Kale, Jayant R., Product Market Linkages, Manager Quality, and Mutual Fund
Performance (September 10, 2012). forthcoming in the Review of Finance. Available at SSRN:
http://ssrn.com/abstract=1429431 or http://dx.doi.org/10.2139/ssrn.1429431.
2
Wermers, Russ, Is Money Really Smart? New Evidence on the Relation Between Mutual Fund
Flows, Manager Behavior, and Performance Persistence (May 2003). Available at SSRN: http://
ssrn.com/abstract=414420 or http://dx.doi.org/10.2139/ssrn.414420.

Role oftheFund Manager

151

Cross-sectional regressions indicate that these abnormal returns are


strongly related to fund inflows, but not to the past performance of the
funds thus, casting some doubt on prior findings of persistent manager
talent in picking stocks. Finally, at the style-adjusted net returns level,
it is observed that there is no persistence, consistent with the results of
prior studies. Ultimately, it is confirmed that money is smart in chasing
winning managers, but that a copycat strategy of mimicking winning
fund stock trades to take advantage of flow-related returns appears to be
the smartest strategy.
A study by Keith Cuthbertson, Dirk Nitzsche and Niall OSullivan
critically evaluates the role of management effects and fund characteristics in mutual fund performance.3 While a number of surveys on mutual
fund performance are available, these have not focused on the role of
manager behavioral biases, managerial characteristics and fund management strategic behavior on fund performance and risk-taking. This study
is an attempt to fill the gap. Empirical results indicate that finding successful funds ex ante is extremely difficult, if not impossible. In contrast,
there is strong evidence that poor performance persists for many of the
prior loser fractile portfolios of funds. A number of manager behavioral biases are prevalent in the mutual fund industry and they generally
detract from returns.
Gianni Amisano and Roberto Savona derive a new model within the
Bayesian framework, where managers are expected to modulate the systemic risk in part by observing how the benchmark returns are related to
some set of imperfect predictors, and in part on the basis of their own
information set.4 In this portfolio allocation process, managers care about
the potential benefits arising from the market timing generated by benchmark predictors and by private information. In applying this model, we
impose a structure on fund returns, betas and benchmark returns that
helps to analyze how managers really use predictors in changing invest3

Cuthbertson, Keith and Nitzsche, Dirk and OSullivan, Niall, A Review of Behavioural and
Management Effects in Mutual Fund Performance (January 28, 2016), International Review of
Financial Analysis. Available at SSRN: http://ssrn.com/abstract=2723890.
4
Amisano, Gianni and Savona, Roberto, Imperfect Predictability and Mutual Fund Dynamics:
How Managers Use Predictors in Changing Systematic Risk (March 2008). ECB Working Paper
No. 881. Available at SSRN: http://ssrn.com/abstract=1103484.

152

The Management of Mutual Funds

ments over time. The main findings of their empirical work are that beta
dynamics are significantly affected by economic variables, even though
managers do not care about benchmark sensitivities towards the predictors in choosing their instrument exposure, and that persistence and
leverage effects also play a key role. Conditional market timing is virtually absent, if not negative, over the period 19902005. However, such
anomalous negative timing ability is offset by the leverage effect, which
in turn leads to enhanced mutual fund performance.

Genesis ofManagement Style

The idea of pooling money dates back to 1822, when groups of people in
Belgium established a company to finance investments in national industries under the name of Societe Generale de Belgique, incorporating the
concept of risk-sharing. The institution acquired securities from a wide
range of companies and practiced the concept of mutual funds for risk
diversification.
In 1822, King William I of the Netherlands established a close-end
fund. In 1860, this phenomenon had spread to England. In 1868, the
Foreign and Colonial Government Trust of London was formed, which
pioneered the industry, encouraging entrepreneurship over a large number of securities; this was considered the Mecca of modern mutual funds.
In 1873, Robert Fleming established the Scottish American Trust.
A mutual fund in America is essentially equivalent to a unit trust in
Britain. In the USA mutual funds have come a long way since March 21,
1924, when the first fund, the Massachusetts Investment Trust, was introduced by the professors of Harvard University; it began to offer shares to
the public in 1926. But it was Sherman L.Adams, the father of modern
mutual funds, along with Charles Learoyd and Ashton Carr, who established a modest portfolio of 45 common stocks worth US $50,000. The
crash of the stock markets in 1929 led to the demise of many close-end
funds. By the 1930s, 920 mutual funds had been formed in the USA and
most of them were close-ended. In Canada, the Canadian Investment
Fund was the first to be set up, in 1932, followed by the Commonwealth
International Corporation Limited and Corporate Investors Limited.

Role oftheFund Manager

153

The enactment of the Securities Act of 1933, Investment Company


Act of 1940 and Investment Advisors Act of 1940 led to the revival of
mutual funds in the USA.The mutual fund industry in Japan dates back
to 1937. But an investment trust modeled on the unit trusts of the UK
was established only in l941. Investment trusts in Japan were set up under
the Securities Investment Law of 1951 with three important characteristics, namely contractual nature, open-end and flexibility.
Prior to the 1960s, provident US fund professional investment authorities were more averse to investing in equities, as they are in India today.
In the 1980s, because of high mutual fund returns, employees (through
individual retirement accounts) shifted en masse to an equity option for
their retirement funds. In stark contrast, Japan saw a 60 % decline in
Nikkei from 40,000 to 16,000 as a consequence of Japanese retail investors aversion to equities. With increasing inflation and interest rates
during 1990s, individual and institutional investors became extremely
sensitive to the true value of money. The shift started towards nonintermediation, resulting in the growth of mutual funds. In the USA, the
number of mutual funds grew from 70in 1940 to more than 3,000 by
the end of 1989. The American mutual fund industrys assets increased
from US $44 billion in 1980 to US $1 trillion in 1989. Subsequently
hundreds of mutual funds, both open-end and close-end, were launched
and the concept of mutual funds spread to many regions such as Europe,
the Far East, Latin America and Canada.
Retail investments in US mutual funds were low because of the flatness of the market from 1966 to 1982. The value of securities owned by
American fund houses increased from US $60 billion in 1960 to more
than US $100 billion in 1983. Since the beginning of 1990, investors
have poured over half a trillion dollars into stock and bond mutual funds.
In 1990, the US mutual fund industry consisted of 2,362 mutual funds
with 39,614 investors holding US $570.8 billion of assets. US investors embraced mutual funds with a fervor that even the most optimistic
fund executives could not have predicted. By the end of 1994, mutual
funds had become the second largest US financial institution after the
banking sector, holding assets worth US $2,161.4 billion. In 1995, the
UKs equity income category had the highest number of account holders
(1,186,365).

154

The Management of Mutual Funds

By the end of 1996, of the US mutual fund industrys (US $3,539


trillion) assets, households owned US $2,626 trillion (74.2 %) while the
remaining US $9,123 billion (25.8 %) was held by banks, trustees and
other institutional investors. In 1996, American households purchased
US $543 billion financial assets compared to US $499.6 billion in 1995,
with a significant proportion assigned towards long-term mutual funds.
Emergence of mutual funds in India is a product of constraints on the
banking sector to tap the fruits of the capital market and the reluctance of
investors to take a direct plunge into complex and erratic capital market operations. Mutual funds entered this service sector in an admirable manner. The
Indian Mutual Fund Industry (IMFI) is among the top 15 nations in terms
of assets under management, which has crossed US $100 billion. As a globally significant player the IMFI is attracting a larger proportion of household
investments and is expected to witness five to six times grow thin the next
seven to eight years. It is expected that the industrys assets under management
(AUM) may grow to US $500600 billion by 2015 as more global players are
planning and ready to set up asset management businesses in India.
Among the mutual funds, it is expected that debt oriented schemes will
continue to dominate the industry, satisfying the needs of yield, security
and liquidity fairly well besides being attractive from the tax point of view.
While equity oriented schemes are likely to gain more significance in the
future, their popularity will depend on the conditions of the stock market
and the kind of tax relief accorded to them. Hence, it is of the utmost
importance to study the attitude of fund managers in terms of the growth
of the mutual fund industry, which is a near substitute for direct investment
in shares. Analysis of risk-return of schemes and its relationship with the
market will provide information on the performance of sample schemes,
and fund managers ability in selecting and timing security-related transactions in the present scenario of multitudinous mutual fund schemes.

Growth ofMutual FundsGlobal View

The fund managers role is changing and widening particularly considering the growth of mutual funds since the eighteenth century. The following paragraphs offer a brief insight into the growth of mutual fund
industry.

Role oftheFund Manager

155

The history of mutual funds dates back to the nineteenth century when
the concept was introduced into Great Britain. In 1868 Robert Fleming
set up the first investment trust called Foreign and Colonial Investment
Trust, which promised to manage the finances of the moneyed classes of
Scotland by scattering the investment over a number of different stocks.
This investment trust and other investment trusts which were afterward
set up in Britain and the USA resembled todays close-ended mutual
funds. The stock market crash in 1929, the Great Depression and the
outbreak of World War II slackened the pace of growth of the mutual
fund industry. Innovations in products and services increased the popularity of mutual funds in the 1950s and 1960s. The first international
stock mutual fund was introduced in the USA in 1940. In 1976, the
first tax-exempt municipal bond funds emerged and in 1979, the first
money market mutual funds were created. The latest additions are the
international bond fund in 1986 and arm funds in 1990. This industry
witnessed substantial growth in the 1980s and 1990s when there was
a significant increase in the number of mutual funds, schemes, assets
and shareholders. In the USA the mutual fund industry registered a tenfold growth in the 1980s. From 1996 onwards mutual fund assets have
exceeded bank deposits.
Perhaps more outstandingly, the British fund model established a
direct link with the US Securities markets, contributing finance to the
development of the post-Civil War US economy. The Scottish American
Investment Trust, formed on February 1, 1873 by fund pioneer Robert
Fleming, invested in the economic potential of the USA, chiefly through
American railroad bonds. Many other trusts followed that not only targeted investment in America, but led to the introduction of the fund
investing concept on US shores in the late nineteenth century and early
twentieth.
By 1929, there were 19 open-ended mutual funds in the USA with
total assets of US $140 million. But the 1929 stock market crash followed by the Great Depression of 1930 ravaged the US financial market
as well as the mutual fund industry. This necessitated stricter regulation
for mutual funds and for financial sectors. Hence, to protect the interests of common investors, the US government passed various Acts, such
as the Securities Act 1933, the Securities Exchange Act 1934 and the
Investment Companies Act 1940.

156

The Management of Mutual Funds

Mutual Funds inIndia: 2015

AUM is a financial term that denotes the market value of all the funds
being managed by a financial institution (a mutual fund, hedge fund,
private equity firm, venture capital firm or brokerage house) on behalf
of its clients, investors, partners and depositors. The average AUM of all
mutual funds in India for the quarter July 2015 to September 2015 (in
INR billion) is given below (Table 7.1):

AttributesCheck List forFund


Managers

In the literature it has been found that various mutual fund characteristics influence their performance. These characteristics have been called
the attributes of mutual funds. Finance professionals and journalists frequently claim that various fund attributes are useful devices to either
select the top-performing funds or eliminate the worst performers. These
attributes are of paramount importance and are discussed in this section.
(a) Past performance: Past performance refers to the performance of the
mutual fund in previous time periods. It is measured by the return
through net asset value (NAV) of the mutual fund. The NAV and its
calculation are described in detail in later sections.
(b) Asset size: Asset size of a mutual fund is the total market value of all
the securities held in its portfolio. The AMFI has described it as the
assets under management of mutual funds.
(c) Expense ratio: Total expenses of the mutual funds are divided into
three components: management fees; marketing and distribution
fees; and other expenses, including securities custodian fees, transfer
agent fees, shareholder accounting expenses, auditor fees, legal fees
and independent direct fees. The total expenses divided by the funds
average net assets is its expense ratio. As described by the Centre for
Research and Security Prices (CRSP), it is the ratio of the funds
operating expenses paid by shareholders to the total investment.

157

Role oftheFund Manager

Table 7.1 Average assets under management in India, July to September 2015
Sr No

Mutual fund name

Average AUM

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42

HDFC Mutual Fund


Reliance Mutual Fund
ICICI Prudential Mutual Fund
Birla Sun Life Mutual Fund
UTI Mutual Fund
SBI Mutual Fund
Franklin Templeton Mutual Fund
IDFC Mutual Fund
Kotak Mahindra Mutual Fund
DSP Black Rock Mutual Fund
Tata Mutual Fund
Deutsche Mutual Fund
L&T Mutual Fund
Sundaram Mutual Fund
J.P.Morgan Mutual Fund
Religare Invesco Mutual Fund
Axis Mutual Fund
LIC NOMURA Mutual Fund
Canara Robeco Mutual Fund
HSBC Mutual Fund
JM Financial Mutual Fund
Baroda Pioneer Mutual Fund
IDBI Mutual Fund
PRINCIPAL Mutual Fund
Goldman Sachs Mutual Fund
BNP Paribas Mutual Fund
Morgan Stanley Mutual Fund
Peerless Mutual Fund
Taurus Mutual Fund
Pramerica Mutual Fund
Union KBC Mutual Fund
Indiabulls Mutual Fund
ING Mutual Fund
PineBridge Mutual Fund
BOI AXA Mutual Fund
Mirae Asset Mutual Fund
Motilal Oswal Mutual Fund
Quantum Mutual Fund
PPFAS Mutual Fund
Escorts Mutual Fund
Sahara Mutual Fund
IIFL Mutual Fund

1,034.42
952.28
853.03
773.44
700.57
595.58
448.12
396.65
352.99
304.86
179.66
170.59
150.79
139.47
132.57
125.12
123.18
79.76
76.16
67.18
62.44
52.63
47.71
43.00
41.49
35.38
32.90
28.35
27.32
21.66
19.80
16.06
11.05
11.03
10.82
5.08
4.37
3.15
2.67
2.52
2.33
2.07

12.70
11.69
10.48
9.50
8.60
7.31
5.50
4.87
4.34
3.74
2.21
2.10
1.85
1.71
1.63
1.54
1.51
0.98
0.94
0.83
0.77
0.65
0.59
0.53
0.51
0.43
0.40
0.35
0.34
0.27
0.24
0.20
0.14
0.14
0.13
0.06
0.05
0.04
0.03
0.03
0.03
0.03
(continued)

158

The Management of Mutual Funds

Table 7.1 (continued)


Sr No

Mutual fund name

Average AUM

43
44
45
46
47

Edelweiss Mutual Fund


Daiwa Mutual Fund
IL&FS Mutual Fund (IDF)
Shriram Mutual Fund
SREI Mutual Fund (IDF)
Grand Total

1.94
0.51

8,142.68

0.02
0.01
0.00
0.00
0.00
100.0

(d) Load status: Investment in mutual funds costs the investors a load
fee. AMFI has described two types of load fee: entry load and exit
load. Entry load is the charge collected by a scheme when it sells the
units. It is also called sales load or front-end load. Exit load is the
charge collected by a scheme when it buys back its units from the
unit holders. It is also called the repurchase or back-end load. The
Securities Exchange Board of India (SEBI) has abolished entry load
from all mutual fund schemes in India with effect from August 1,
2009.
(e) Investment style: Mutual fund schemes possess specific investment
styles informed by their investment objectives, for example equity
funds for growth of capital, income funds for regular income, balanced funds for a balanced combination of regular income and
growth, and liquid funds for liquidity. They have also been classified
according to their functions as open ended, close ended, and so on.
(f ) Risk: Investment is always associated with some risk. Risk involved
in the investment of a mutual fund scheme is measured as the deviation in actual return from the expected one. A mutual funds risk is
calculated in two ways. One is the total risk measured by the standard deviation () and the other is the systematic risk measured by
the beta ().
(g) Age of the mutual fund scheme: Past literature has considered the
age of the mutual fund as an attribute that affects its return performance because of the economies of experience. The age of the mutual
fund schemes at any particular time is determined by the time period
since their inception date. A wide variety of mutual fund schemes
exists to cater to needs such as financial position, risk tolerance and

Role oftheFund Manager

159

return expectations, for example. The list below gives an overview of


the existing types of schemes in the industry (see Table 7.2).

Board ofDirectors Role inOrganizing


Mutual Funds inIndia

In India, mutual funds combine investment with trust, which is reflected


in SEBIs regulation of the establishment of mutual funds. Trustee sponsors of the mutual fund, under the Indian Trust Act, 1882, are represented by a board of directors under the trustee company. The Board of
Directors appoints the asset management company (AMC) and custodians. The board of trustees makes relevant agreements with the AMC
and custodian. The launch of each scheme involves inviting the public
to invest in it, through offer documents. Depending on the particular
objective of the scheme, it may open for further sale and re-purchase of
units; and again in accordance with the particulars of the scheme, it may
be wound up after the particular time period.
1. The sponsor has to register the mutual fund with SEBI
2. To be eligible to be a sponsor, the corporate body should have a sound
track record and a general reputation of fairness and integrity in all its
business transactions.
Table 7.2 Type of fund and nature of investment
Type of fund

Typical investment

Equity or
growth fund
Fixed income
fund
Money market
fund
Balanced fund
Sector-specic
fund
Index fund

Equities such as stocks

Fund of funds

Fixed income securities such as government and corporate


bonds
Short-term xed income securities such as treasury bills
A mix of equities and xed income securities
Sectors such as IT, pharma, auto
Equities or xed income securities chosen to replicate a
specic index, for example S&P CNX Nifty
Other mutual funds

160

7.1

The Management of Mutual Funds

Meaning ofSound Track Record

A firm will be classed as having a sound track record when the corporate body has been in the financial services business for at least five years
and has a positive net worth in the five years immediately preceding the
application of registration.

7.2

How toMeasure aSound Track Record

The following steps indicate the procedure for measuring the sound
track record of a mutual fund organization.
(a) Net worth in the immediately preceding year is more than its contribution to the capital of the AMC.
(b) Earning a profit in three out of the five preceding years, including the
fifth year.
(c) The sponsor should hold at least 40 % of the net worth of the AMC.
(d) A party which is not eligible to be a sponsor shall not hold 40 % or
more of the net worth of the AMC.
(e) The sponsor has to appoint the trustees, the AMC and the
custodian.
(f ) The trust deed and the appointment of the trustees have to be
approved by SEBI.
(g) An AMC or its officers or employees cannot be appointed as trustees
of the mutual fund.
(h) At least two-thirds of the business should be independent of the
sponsor.
(i) Only an independent trustee can be appointed as a trustee of more
than one mutual fund; such appointment can be made only with the
prior approval of the fund of which the person is already acting as a
trustee.

7.3

Role oftheFund Manager

161

Launching aScheme

Before its launch, a scheme has to be approved by the trustees and a copy
of its offer documents filed with the SEBI.
(a) Every application form for units of a scheme is to be accompanied by
a memorandum containing key information about the scheme.
(b) The offer document needs to contain adequate information to enable
the investors to make informed investment decisions.
(c) All advertisements for a scheme have to be submitted to SEBI within
seven days of the issue date.
(d) The advertisements for a scheme have to disclose its investment
objective.
(e) The offer documents and advertisements should not contain any
misleading information nor any incorrect statement or opinion.
(f ) The initial offering period for any mutual fund schemes should not
exceed 45 days, the only exception being equity linked saving
schemes.
(g) No advertisements can contain information whose accuracy is dependent on assumption.
(h) An advertisement cannot carry a comparison between two schemes
unless the schemes are comparable and all the relevant information
about the schemes is given.
(i) All advertisements need to carry the name of the sponsor, the trustees
and the AMC of the fund.
(j) All advertisements need to disclose the risk factors.
(k) All advertisements shall clarify that investment in mutual funds is
subject to market risk and the achievement of the funds objectives
cannot be assured.
(l) When a scheme is open for subscription, no advertisement can be
issued stating that the scheme has been subscribed or over
subscription.

162

The Management of Mutual Funds

SEBI Guidelines Relating toManagement


ofMutual Funds5

(a) Appointment of Dedicated Fund Manager


As outlined in Academic Monthly Bulletin on Money, Banking and
Finance,6 The Mutual Fund should appoint a dedicated Fund Manager
for making investments in ADRs/GDRs/Foreign Securities and overseas ETFs. However, the existing schemes which had already invested
in ADRs/GDRs/Foreign Securities were given a relaxation period of
six months for ensuring their compliance with said requirement [from
August 2, 2006].
(b) Due Diligence
Moreover, as outlined in Academic Monthly Bulletin on Money, Banking
and Finance,7 Boards of AMCs and their trustees are expected to carry out
their due diligence when planning and executing investment decisions,
as stipulated under Regulation 25 (2). In doing so, they should examine
both international and domestic risks and returns of investments and
investment instruments, such as Exchange Traded Funds. They should
compare them and assess the differences in likely yields for investors. Not
only should investments be made in liquid actively traded securities,
but the boards of AMCs are also able to set their own restrictions on
investments (Kapila, 2006). For instance, they can set geographic limits
and rating thresholds. Moreover, the board must be satisfied that both
the AMC and other service providers are suitably qualified and equipped
to perform investment-related transactions and support the necessary
infrastructure. They can assess this by analyzing compliance and performance records in both domestic and international contexts.
5

Academic Monthly Bulletin on Money, Banking and Finance, Ed. Sona Kapila, Academic
Foundation, Vol 81, September 2006, 158162.
6
Academic Monthly Bulletin on Money, Banking and Finance, Ed. Sona Kapila, Academic
Foundation, Vol 81, September 2006, 158162.
7
Academic Monthly Bulletin on Money, Banking and Finance, Ed. Sona Kapila, Academic
Foundation, Vol 81, September 2006, 158162.

Role oftheFund Manager

163

(c) Disclosure Requirements


As outlined in Academic Monthly Bulletin on Money, Banking and
Finance, the disclosure requirements listed below are mandatory for
mutual fund schemes intending to invest in foreign securities:
I. Intention to invest in foreign securities/ETFs has to be disclosed in
the offer documents of the schemes. The attendant risk factors and
returns ensuing from such investments should be explained clearly in
offer documents. The mutual funds should also disclose as to how
such investments will help in the furtherance of the investment
objectives of the schemes. Such disclosures should be in a language
comprehensible to an average investor in mutual funds.
II. The mutual funds should disclose the name of the dedicated Fund
Manager for making investments in ADRs/GDRs/Foreign Securities
and Overseas ETFs.
III. In case of schemes investing in ETFs the nature of experience of
mutual fund or its Sponsors of having invested in foreign securities
should be appropriately disclosed in the offer document.
IV. The mutual funds have to disclose exposure limits i.e. the percentage
of assets of the scheme they would invest in foreign securities/ ETFs.
V. Such investments should be disclosed while disclosing half-yearly
portfolios in the prescribed format by making a separate heading
Foreign Securities/overseas ETFs. Scheme-wise percentage of
investments made in such securities should be disclosed while publishing half-yearly results in the prescribed format, as a footnote.
(Kapila, 2006)
(d) Investment by Existing Schemes
Contingent upon the appointment of a dedicated fund manager for
coordinating ADRs, GDRs and foreign securities, a preexisting scheme
of mutual funds is permitted to invest freely in foreign securities. The
schemes offer document must allow for this investment type and take
account of the potential risks involved, and an addendum must be
issued to notify unit holders of the schemes investment intentions. If

164

The Management of Mutual Funds

the offer document does not allow for overseas investments (via ETFs,
ADRs, GDRs, Securities, etc.), a scheme may embark on such investments, provided that it follows SEBI guidelines and appraises its unit
holders through written communication of its investment intentions
and the associated risks. Additionally, the scheme is required to place
two advertisementsone in an English-language daily newspaper,
with national circulation, and one in the local language newspaper
where the schemes headquarters are basedto provide proper notification of its intention to invest in foreign securities (Kapila, 2006).
(e) Reporting to Trustees
As outlined in Academic Monthly Bulletin on Money, Banking and
Finance: The AMCs should send detailed periodical reports to the trustees which should include the following aspects:
I. Performance of investments made in foreign securities and overseas
ETFs in various countries.
II. Amount invested in various schemes and any breach of the exposure
limit laid down in the scheme offer documents (Kapila, 2006).
(f ) Review of Performance
Boards of AMCs and trustees are expected to discuss and analyze
the performance of their schemes foreign investments and ETFs and
compare them with the returns of analogous investments in the domestic
market. In this review, the board must assess what the balance and selection of their international and domestic investment portfolio should be.
As Kapila (2006) states, In case of schemes investing exclusively in foreign securities/overseas ETFs, performance may also be compared with
appropriate benchmark(s).
(g) Reporting to SEBI
According to the SEBI guidelines, the AMCs and trustees should
offer their comments on the compliance of these guidelines in the quarterly and half-yearly reports filed with SEBI (Kapila, 2006).

Role oftheFund Manager

165

Summary

This chapter deals with the role of the fund manager and their styles of
investment management. It also focuses on some important studies that
discuss how fund manager attributes can enhance the value of mutual
funds. In addition to this, the chapter clarifies the duties and responsibilities of fund managers as suggested by SEBI in India. Thus, the success
of an investment activity completed by a fund manager depends on his
knowledge and ability to invest the right amount, in the right type of
investment, at the right time. In the present dynamic global environment, exploring investment avenues is of great relevance.

Appendix: Challenges Faced by Global


Financial Markets, 19872007

Year

Challenge

Details

Country

1987

Fall in DJIA

USA

1988

Deregulated
markets

1990

Trouble in
Japanese
market

1992

UK exits ERM

Dow Jones Industrial Average (DJIA) falls


508 points or 22.6 % in the steepest
decline since 1929. Hence, portfolio
insurance and computerized trading
takes some of the blame for what ranks
as the fth largest point drop in DJIA
Deregulated S&Ls get in over their heads,
and more than 1,000 institutions fail, in
many cases as the result of malfeasance
and fraud. The ensuring bailout costs the
US government an estimated $125 billion
in direct subsidies
After the bank of Japan raises rates to cool
its overheated economy, the Nikkei stock
index plunges more than 30,000 points. It
continues to struggle for more than a
decade until its post-bubble low of
7,608in 2003, down 80 % from its high
Britain is forced to leave European
Exchange Rate Mechanism following a
wave of speculative attacks on its
currency

USA

Japan

UK

(continued)

The Author(s) 2017


G.V.S. Sekhar, The Management of Mutual Funds,
DOI10.1007/978-3-319-34000-5

167

168

Appendix: Challenges Faced by Global Financial Markets, 19872007

(continued)
Year

Challenge

Details

Country

1995

Cause of
problem of
Barings
Bank

Singapore

1997

Asian
nancial
crisis

1998

Russian
nancial
crisis

1999

Recession in
Argentina

2001

Financial crisis
in Turkey

Leeson, a 28-year-old trader based in


Singapore, loses more than $1 billion on
futures pegged to the Nifty 225 stock
index in Japan and single-handedly
brings down Barings Bank, the UKs
oldest investment bank
Thailand runs out of foreign exchange
reserves to support its currency and oats
the baht, which falls 20 % to a record
low. The prices spread through much of
Asia with the Philippines, Indonesia,
South Korea and Thailand the most
affected. The IMF establishes a $40 billion
program to support these currencies
The Russian economy is hit by declining oil
prices in the global recession of 1998 that
follows the Asian nancial crisis. The
Russian central bank widens the trading
band for the ruble, which drops 12 % on
the day of the announcement. The
government also imposes a 90-day
moratorium on foreign debt payments
As its exports are hurt by a devaluation of
the Brazilian real, Argentinas GDP falls 4
%, marking the beginning of a recession
that would last for three years. The crisis
boils over into riots in December 2001,
when the government devalues the peso
and freezes bank assets
Prime Minister Bullent Ecevit clashes openly
with President Ahmed Necdet Sezer over
reforms, triggering a crisis. Interest rates
shoot up to 7,000 % and stock prices fall.
The Turkish lira loses more than 40 % of its
value as the government abandons
exchange controls

Thailand

Russia

Argentina

Turkey

Appendix: Challenges Faced by Global Financial Markets, 19872007

169

(continued)
Year

Challenge

Details

Country

2002

Uruguay
banking
crisis

Uruguay

2007

US sub-prime
mortgage
crisis

Uruguay suffers a massive run on its banks,


causing the government to freeze
banking operations. Uruguays real GDP
falls by 12 % in 2002 as a result of its
heavy dependence on neighboring
Argentina. The US treasury provides a
$1.5 billion bridge loan to the Uruguayan
government to tide it over to a bankrescue fund nanced by multinational
organizations including the IMF
Losses in the sub-prime market trigger a
credit crunch. The risks are distributed
widely through securitization, and
worries that the crisis would spread to
the broader economy disrupt global
nancial markets for months. The Federal
Reserve cuts interest rates and oods the
market with liquidity

Source: Prepared by Gordon Plant, Global Finance, December 2007

USA

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Index

A
agent, 5, 52, 75, 86, 97, 156
asset management, 1, 15, 19, 345,
42n19, 434, 54n59, 59, 74,
96n1, 10931, 109n1, 154
asset management company (AMC),
2, 46, 12, 22, 24, 2830, 34,
43, 74, 77, 79, 81, 8392, 95,
107, 10910, 11719, 1224,
128, 131, 15962, 164
assets under management (AUM),
11, 1720, 45, 84, 11415,
120, 154, 1567
Association of Mutual Funds in India
(AMFI), 19, 81, 8493, 156,
158
B
balanced funds, 17, 24, 1589
benchmarking, 1, 6, 345, 37, 403,
59, 95107

beta analysis, 53, 59


Bombay Stock Exchange (BSE), 26,
1004, 1067

C
capital asset pricing model (CAPM),
47, 51n49, 54, 97n7, 136
capital market, 12, 7, 12, 25, 38,
49, 723, 75, 84, 86, 100,
137, 150, 154
certificate of deposits (CDs), 24
Chang hung and Lee model, 97
Choi model, 53, 133
close ended schemes, 67, 21
commercial paper (CPs), 24
compound annual growth rate, 9
corporate governance, 1, 56, 335,
3740, 59, 6193
custodian, 46, 9, 13, 223, 28, 79,
86, 156, 15960

The Author(s) 2017


G.V.S. Sekhar, The Management of Mutual Funds,
DOI10.1007/978-3-319-34000-5

177

178

Index

D
data envelopment analysis (DEA), 52
debentures, 3, 24
debt fund, 3, 17, 118, 123
distributor, 5, 81, 84
domestic funds, 25, 42, 114, 1345

E
Elango model, 56
equity linked savings scheme (ELSS),
26, 47, 83
equity oriented fund, 19, 13943
equity schemes, 84
exchange trade fund (ETFs), 278,
99100, 1624

F
Fama model, 50, 138, 138n10
fast moving consumer goods
(FMCG), 128
Fidelity investments, 30
financial institutions, 5, 8n2, 13, 15,
302, 61, 77, 93, 111
floating rate income schemes, 17
foreign direct investment (FDI), 70
foreign partner, 15
fund manager, 14, 22, 25, 27, 29,
34, 37, 39, 42, 44, 44n23, 45,
54, 569, 62, 65, 778, 96,
989, 1067, 10910, 110n2,
11516, 119, 1278, 133,
1402, 14765, n60
fund of funds, 11718, 159
fund sponsor, 4, 6

G
General Insurance Corporation of
India (GIC), 12, 131
gilt funds, 26, 118
gilt short term, 17
global deposit receipt (GDR), 1624
global mutual funds trends, 89,
301, 1345
gold exchange trade fund, 17
growth fund, 7, 17, 24, 26, 118,
159

H
Hongkong Shangahi Banking
Corporation (HSBC), 103,
106, 157
Housing Development Finance
Corporation (HDFC), 7, 100,
1034, 1067, 110, 11721,
1235, 1278, 1437, 157

I
income fund, 24, 121, 1589
index funds, 9, 267, 43, 43n20, 96,
96n2, 98, 103, 106, 1245,
127, 143, 145, 147, 159
Indian mutual fund industry, 8n1,
10n5, 11, 19, 81n6, 110n5,
111
Industrial Credit Investment
Corporation of India (ICICI),
1516, 78, 100, 105, 107,
13940, 1428, 157
Industrial Development Bank of
India (IBDI), 11

Index

Industrial Development Finance


Corporation (IDFC),
157
initial public offering (IPO), 7, 17,
73, 78
investible funds, 27
investment behaviour, 41
Investment Company Institute (ICI),
9, 37, 37n1
investment mix, 43, 123
investor, 13, 611, 13, 1619,
212, 2530, 34, 389, 412,
445, 53, 624, 67, 70, 73,
779, 81, 835, 95, 989,
106, 10913, 11617, 128,
1335, 13940, 142, 14850,
1524, 156, 158, 161 163

J
Jensen analysis, 45, 51
Jensen model, 49

L
leaders and laggards, 46
Life Insurance Corporation of India
(LIC), 12, 18, 157
liquid fund, 118, 121, 158

M
Massachusetts Investor Trust, 910,
152
money market mutual funds, 24,
155
monitoring funds, 3

179

Mutual Funds (MFs), 1, 36, 810,


37, 61, 95, 109, 133, 149

N
National Stock Exchange (NSE), 86,
100
National Stock Exchange 50 Index
(NIFTY), 268, 100, 1027,
159, 168
net asset value (NAV), 7, 10, 16, 21,
289, 47, 51, 56, 70, 80, 99,
130, 1402, 151, 156

O
offshore funds, 23, 25
open ended schemes, 67, 10, 212,
29, 83

P
pension funds, 23, 27, 44, 44n26, 46
portfolio management, 1, 6, 23, 35,
37, 42, 447, 45n27,
51n4151n42, 52n50, 52n53,
56n69, 59, 65, 78, 110,
13348
portfolio manager, 2, 6, 38, 456,
53, 134
private sector, 1, 1519, 21, 39, 56,
63, 93
provident funds, 23, 27, 73
public sector, 3, 1216, 19, 556,
61, 77, 83, 93
Punjab National Bank Mutual Fund
(PNBMF), 12

180

Index

R
regression model, 49
Reserve Bank of India (RBI ), 11,
1415, 26, 79, 93
resource mobilization, 1314
retail investors, 3, 17, 78, 153
risk return analysis, 154

transfer agent, 5, 156


trends and projections of resources,
114
Treynor analaysis, 46, 51
Treynor and Mazuy model, 46,
489, 136
trustees, 46, 12, 23, 7981, 845,
91, 117, 154, 15962, 164

S
scheduled commercial banks (SCBs),
80
schemes wise resources, 13
sector funds, 1215, 1718, 56, 124
Securities and Exchange Board of India
(SEBI), 1 6, 36, 13, 1819,
213, 2830, 62, 7787, 903,
989, 110, 117, 15865
Sharpe analysis, 51
Sharpe model, 51, 133
short-term income schemes, 17
special sales price, 7
stand deviation analysis, 55, 97
State Bank of India (SBI), 12, 18,
1002, 106, 124, 127, 1435,
147, 157
Statman model, 55
stock market, 910, 46n29, 48, 52,
96, 99, 1345, 152, 1545

U
underwriter, 23
United States of America (U.S.A.),
810, 15, 22, 27, 30, 33, 42,
44n24, 51n43, 54n63, 62,
11011, 121, 1523, 155,
167, 169
unit holding pattern, 87, 91
unit investment trusts, 9
Unit Scheme 1964 of UTI (US 64),
11, 17, 62
Unit Trust of India (UTI), 1120,
256, 612, 8691, 101, 106,
124, 127, 131, 1404, 147,
157
Unit Trust of India Mutual Funds
(UTIMF), 867
US financial markets, 155
US scheme, 17

T
Tax scheme, 25

V
venture capital funds, 23, 26