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1 MUTUAL FUND: The SEBI regulations, 1993 defines a mutual fund as “a fund in the form of a trust by a sponsor, to raise money by the trustees trough the sale of units to the public, under one or more schemes, for investing in securities in accordance with these regulations” A mutual fund is a professionally-managed firm of collective investments that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. In a mutual fund, the fund manager, who is also known as the portfolio manager, trades the fund's underlying securities, realizing capital gains or losses, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding. 1.1.2 HISTORY OF THE MUTUAL FUND: In the beginning: Historians are uncertain of the origins of investment funds; some cite the closed-end investment companies launched in the Netherlands in 1822 by King William I as the first mutual funds, while others point to a Dutch merchant named Adriaan van Ketwich whose investment trust created in 1774 may have given the king the idea. Van Ketwich probably theorized that diversification would increase the appeal of investments to smaller investors with minimal capital. The name of van Ketwich's fund, EENDRAGT MAAKT MAGT, translates to "unity creates strength". The next wave of near-mutual funds included an investment trust launched in Switzerland in 1849, followed by similar
vehicles which is followed by many kind of companies 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 U.S. 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 Alexander Fund featured semi-annual issues and allowed investors to make withdrawals on demand.
The Arrival of the Modern Fund :
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. 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 of investments in business and trade.
Regulation and Expansion:
By 1929, there were 19 open-end mutual funds competing with nearly 700 closedend funds. With the stock market crash of 1929, the dynamic began to change as highlyleveraged closed-end funds were wiped out and small open-end funds managed to survive. Government regulators also began to take notice of the fledgling mutual fund industry. The creation of the Securities and Exchange Commission (SEC), the passage of the Securities Act of 1933 and the enactment of the Securities Exchange Act of 1934 put in place safeguards to protect investors: mutual funds were required to register with the SEC and to provide disclosure in the form of a prospectus. The Investment Company Act of 1940 put in place additional regulations that required more disclosures and sought to minimize and minimize grievience of investor of different catogeries conflicts of interest. The mutual fund industry continued to expand. At the beginning of the 1950s, the number of open-end funds topped 100. In 1954, the financial markets overcame their 1929 peak, and the mutual fund industry began to grow in earnest, adding some 50 new funds over the course of the decade. The 1960s saw the rise of aggressive growth funds, with more than 100 new funds established and billions of dollars in new asset inflows. Hundreds of new funds were launched throughout the 1960s until the bear market of 1969 cooled the public appetite for mutual funds. Money flowed out of mutual funds as quickly as investors could redeem their shares, but the industry's growth later resumed. Massachusetts Investors Trust (now MFS Investment Management) was founded on March 21, 1924, and, after one year, had 200 shareholders and $392,000 in assets. The
entire industry, which included a few closed-end funds, represented less than $10 million in 1924. The stock market crash of 1929 slowed the growth of mutual funds. In response to the stock market crash, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require that a fund be registered with the (SEC) . 1.1.3 SETUP OF MUTUAL FUNDS: A mutual fund is set up in the form of a trust, which has sponsor, trustees, Asset Management Company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. Asset management company (AMC) approved by SEBI managers the fund by making investments in various schemes of the in its custody. The trustees are vested with the general power of superintendence and direction over AMC. performance and compliance of SEBI regulations by the mutual fund. SEBI regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e., they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme. The performance of a particular scheme of a mutual fund is denoted by net value (NAV). 1.1.4 MUTUAL FUND VS OTHER INVESTMENT: Mutual funds offer several advantages over investing in individual stocks. For example, the transaction costs are divided among all the mutual fund shareholders, who also benefit by having a third party (professional fund managers) apply expertise and dedicate time to manage and research investment options. However, despite the professional management, mutual funds are not immune to risks. They share the same risks associated They monitor the
with the investments made. If the fund invests primarily in stocks, it is usually subject to the same ups and downs and risks as the stock market. 1.1.5 SHARE CLASES: Many mutual funds offer more than one class of shares. For example, you may have seen a fund that offers "Class A" and "Class B" shares. Each class will invest in the same pool (or investment portfolio) of securities and will have the same investment objectives and policies. But each class will have different shareholder services and/or distribution arrangements with different fees and expenses 1.1.6 DISTRIBUTION CHANNELS IN THE MUTUAL FUND INDUSTRY: In India, AMCs work with five distinct distribution channels those are direct , banking, retail, corporate and indiual financial adviser.
The Direct Channels: In the direct channel, customers invest in the schemes directly through AMC. In most cases , the company does not provide any investment advice, so these investors have to carry out their own research and select schemes themselves. The fund companies provide several tools to investors who invest through this channel. This includes monthly a/c statement, processing of transaction, and maintaince of records. In this channel most investors can invest through websites, or receive information through telephonic services provided by the company. About 10-20% of the total sales of an AMC come through this direct channel.
The banking channel: The large customer base of banks, in devolped countries, have played an important role in the selling MFs. In the recent years, this cahannel has also
opened up in india. Banks operating in india , including public sector, private and foreign banks have established tie-up with various fund companies for providind distribution and servicing. The banking channel is likely to develop as the most vital distribution channel for fund companies there are several reaons for the same. Customers remain invested in banks for long periods of time and therefore banks maintain a relationship of trust with their customers. Customers are rely on advice provided to them by bankers as they are always on the look out for better investment avenues. Managers are guiding to customers about various funds. An additional advantage that banks provide is that the concerned customer becomes a permanent contact of the banks and therefore can be reached during launch of (new fund offer) NFO or new schemes any time in the future.
The retail channel: A customer can deal with directly with a sub broker belonging to a distribution company, instead of taking trouble of dealing with several agents. Distribution companies sell the schemes of several fund houses simultaneously and brokerage is paid by the AMC whose funds they sell. The retail channel offer the benefits of specialist knowledge and established client contact and, therefore private fund houses are generally prefer this channel. Some of the major players in India in this in this channel are national players lke Karvey, Birla sunlife IL&FS and cholamandalam. The key factor for this channel to sell a company’s fund used to be the brokerage paid. The banking and retail channel generally contribute to about 50-70% of the total Asset Under Management(AUM).
The corporate channel:
The corporate channel includes a variety of institutions that invest in shares on the company’s name. these are businesses, trust, and even state and local governments. For institutional investors, fund managers prefer to create special funds and share classes. Corporate can either invest directly in mutual funds, or through an intermediary such as a distribution house or a bank. Corporate exhibit varying degrees ‘of awareness of mutual fund products. Most of the established corporate, such as the TVS industries in Hyderabad, are wellversed with the performance and composition of various funds. The smaller companies and start-up firms, however, need to be educating on several aspects of mutual funds. In order to provide information to such clients, fund companies usually organize presentation for these companies or set-up meetings with the finance managers.
Individual Financial Advisors(IFA) or Agents:
The IFA channel is the oldest channel for distribution and was widely employed at the time when UTI monopoly in the market. In recent times with the emergence significantly decreased.
An agent who basically acts as an interface between the customer and the fund house there is a unique systems in place in India , wherein several sub-brokers are working under one main broker. The huge network of sub-brokers, thus ensure larger market penetration and geographic coverage. As per AMFI, over one lakh agents are registered to sell mutual funds and other financial products such as insurance across the country.
1.1.7 SEBI REGULATION ON THE INVESTMENT OF A MUTUAL FUND:
The investments of a mutual fund are subjected to a set of regulations prescribed by SEBI. Presently following restrictions apply. • • No term loan shall be granted by a mutual fund scheme. A mutual fund, under all its schemes taken together, will not own more than 10 % of any company’s paid up capital carrying voting rights. A scheme may invest in another scheme under the same asset management company or any other mutual fund withought charging any fees, provided • A scheme may invest in another sheme under the same asset management company or any other mutual fund without charging any fees, provided that the aggregate inter – scheme investment made by all the schemes under the same management. • Transfers of investment from one scheme to another scheme of mutual fund permitted provided that: a. Such transfers are done at the prevailing market price for quoted instruments on spot basis. b. The securities so transferred shall be in conformity with the investment objectives of the schemes to which such transfer has been made. c. The registration and accounting of the transactions is completed and ratified in the next meeting of the board of trustees. • A mutual fund may borrow to meet liquidity needs, for the purpose of repurchase, redemption of units, or repayment of interest or dividend to the unitholders. Such borrowings shall not exceed 20% of the net asset of the scheme and the duration of the borrowing shall not exceed 6 months. The fund may borrow from permissible entities at prevailing market rates and may offer the assets of the schemes as collateral for such borrowings.
A scheme shaal not invest more than 15% of its NAV in debt instruments issued by a single issuer which are rated not below investment grade by an authorized credit rating agencu. Such investment limit may be extended to 20% of the NAV of the scheme with the prior approval of Board of Trusttes and the Board of Asset Management Company. This limit, however, is not applicable for investment in governments securities and money market instruments.
A scheme shaal not invest more than 10% of its NAV in unrated debt instruments issued by a single issuer and the total investment in such instruments shall not exceed 25% of the NAV of the scheme.
A mutual fund will buy and sell securities on the basis of deliveries. It cannot make short sales or engage in carry forward transactions. A scheme shall not make any investment in a. Any unlisted security of an associates or group company of the sponsor . b. Any security issued by way of private placement by an associate or group company of the sponsor c. The listed securities of group companies of the sponsor in exess of 25% of the net assets.
The investment manager may invest in a scheme from time to time. The percentage of such investments to the total net assets may vary from time to time and can be upto 100% of the net assets of the schemes.
A scheme shall not invest more than 10% of its NAV in the equity shares or equity related instruments of any one company. A scheme may invest in ADRs/GDRs of Indian companies listed on overseas stock exchanges to the extent and in a manner approved by RBI .
A scheme shall not invest more than 5% of its NAV in unlisted euity shares or equity related instruments in case of an open ended schemes and 10% of its NAV in case a of closed ended scheme. 1.1.8 TAX SAVING ON MUTUAL FUND:
A. There are two types of tax-saving funds, equity-linked savings schemes (ELSS) and pension funds. ELSS schemes are basically diversified equity schemes, which have a three-year lock-in. Investments here—subject to a maximum of Rs 10,000—receive a tax rebate of 0 to 20 per cent depending on the income slab. As these are equity instruments they have the maximum risk-return potential among all asset classes. What this means is that return has a propensity to vary with great intensity. Although an average tax-saving mutual fund delivered 16.36 per cent in 2002, the range of returns was extreme. Thus, in that year, the best tax-saving fund delivered 42.61 per cent and the worst was down 3.16 per cent. The best way to overcome the vagaries of stock markets is to diversify. Diversification can be across funds and, more importantly, across time periods. By investing regularly every year in these funds one can set up a long-term systematic investment plan. The other route for saving taxes is pension funds, even though there are currently only two such funds in operation, Franklin Templeton's Templeton India Pension Fund and UTI's Retirement Benefit Plan. Introduced for the first time in 1997, pension funds are hybrid schemes, which have a debt orientation, and carry the same tax benefit as ELSS. From the tax point of view, bonus units are conceptually similar to dividend stripping, but somewhat more complex. Bonus units that a fund issue is deemed to have been acquired at zero cost. Thus, whenever they are sold, the entire sale price is treated as capital gains. However, at the time of issue of bonus, the NAV of the fund drops in a proportion that is identical to the ratio at which bonus funds are issued. This fall in the NAV is a capital loss as far as the original units are concerned and it is here that tax benefits can be realised. The original units can be sold off with a capital loss, which can be used to set off other capital gains. The bonus units carry a high tax liability though since you will pay taxes on the entire sale price. Here's an example. Suppose you hold 10,000 units of a fund whose NAV is Rs 15. You made the purchase less than a year ago at an NAV of Rs 12. If today you decide to sell
these units, you will fetch Rs 1.5 lakh, out of which Rs 30,000 will be short-term capital gain. On this, you are likely to pay a tax of Rs 9,000—30 per cent of gains. 1.1.9 ROLE OF MUTUAL FUND IN STOCK EXCHANGE: Mutual funds are an ideal vehicle for investment by retail investors in the stock market for several reasons. i. ii. It pools investments of small investors together increasingly thereby the participation in the stock market. Mutual funds being institutional investors, can invest in market analysis generally not available or accessible to individual investors, providing therefore informed decisions to small investors. iii. Mutual fund can diversify the portfolio in better way as compared with individual investors due to the expertise and availability of funds. Mutual funds in india, because of their mall size and slower growth in the recent past, have tended to play only a limited role in the stock market.the share of mutual funds in total turnover of the stock market (BSE+NSE), which was declined to 3.6% by January 2003. 1.1.10 Mutual Funds – FAQs: (NAV) Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date. Sale Price Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load.
4.9% in January 2000,
Repurchase Price Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price. Redemption Price Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related. Sales Load Is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’ load. Schemes that do not charge a load are called ‘No Load’ schemes. Repurchase or ‘Back-end’ Load Is a charge collected by a scheme when it buys back the units from the unit holders.
1.1.11 COST INVOLVED IN MUTUAL FUNDS: An investor must know that there are certain costs involved while investing in mutual funds. OPERATING EXPENSES: These refer to cost incurred to operate a mutual fund. Advisory fee is paid to investment managers, audit fees to charted accountant, custodial fees, register and transfer agent fees, trustee fees, agent commission. Operating expenses also known as expenses ratio which
is annual expenses expressed as a percentage of these expenses is required to be reported in the schemes offer document or prospectus.
Average net assets
For instant, if funds Rs. 100 crores and expenses Rs. 20 lakhs. Then expenses ratio is 2% expenses ratio is available in the offer document and fro historical per unit statistics included in the financial results of the fund which are published by annually, un audited for the half year ending September 30th and audited for the physically year end 1st March 30th .
Depending upon scheme and net asset, operating expenses are determined by limits mandated by SEBI mutual funds regulation act. Any excess over specified limits as to born by Management Company, the trustees or sponsors.
SALES CHARGES: These are known commonly sale loads, these are charged directly to investor. Sales loads are used by mutual fund for the payment of agent’s commission, distribution and marketing expenses. These charges have no effect on the performance of the scheme. Sales loads are usually expression percentage and or of two types front-end and back-end.
FRONT-END LOAD: It is a one time fixed fee paid by an investor when buying a Mutual funds scheme. It determines public offer price which intern decides how much of your initial investment actually get invested the standard practice of arriving a public offer price is as follows.
Net asset value
Public offer price=
(1-front end load)
Let us assume, an investor invests Rs. 10,000 in a scheme that charges it 2% front end load at a NAV per unit Rs. 10 using the formula public offer price = 10/(1-0.02) is Rs. 10,20. So only 980 units are allowed to the investor.
Number of units allotted=
Amount invested Public offer price
10,000/10,20= 980 units at a NAV of Rs. 10.
This means units worth 9800 are allotted to him an initial investment Rs.10,000 front end loads tend to decrease as initial investment amount increase.
BACK END LOAD:
May be fixed fee redemption or a contingent differed sales charged a redemption so load continues so long as the redeeming or selling of the units of a fund does not take place in the event of a back end load is applied. The redemption price is arrive or using following formula.
Net asset value
Redemption price =
(1+back end load)
Let us assume an investor redeems units valued at Rs. 10,000 in a scheme that charges a 2% back, end load at a NAV per units of Rs. 10 using the formula Redemption price 10/ (1+0.02)= Rs. 9.8 s, what the investor gets in hand is 9800(9.8*1000).
CONTINGENT DEFERRED SALES CHARGES (CDSC): Contingent differed sales charges of a structured back end load. It is paid when the units are reading during the initial years of ownership. It is for a predetermined period only and reduced over the time you invested for a fund. The longer remains in a fund the lower the CDSC.
The SEBI stipulate the a CDSC may be charge only for first four years after purchase of units and also stipulate the maximum CDSC that can we charge every year. This is the SEBI mutual funds regulations 1996 do not allow either the front end load or back end load to any combination is higher than 7%.
TRANSACTION COST: Some funds may also impose a switch over fee which is charge on transfer of investment from one scheme to another within a same mutual funds family and also to switch from one plan to another within same scheme.The real estate mutual funds sector is now being considered as the engine of economic growth.
1.1.12 The objectives of Association of Mutual Funds in India:
The Association of Mutual Funds of India works with 30 registered AMCs of the country. It has certain defined objectives which juxtaposes the guidelines of its Board of Directors. The objectives are as follows:
This mutual fund association of India maintains a high professional and ethical standards in all areas of operation of the industry.
It also recommends and promotes the top class business practices and code of conduct which is followed by members and related people engaged in the activities of mutual fund and asset management. The agencies who are by any means connected or involved in the field of capital markets and financial services also involved in this code of conduct of the association.
AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fund industry.
Association of Mutual Fund of India do represent the Government of India, the Reserve Bank of India and other related bodies on matters relating to the Mutual Fund Industry.
It develops a team of well qualified and trained Agent distributors. It implements a programme of training and certification for all intermediaries and other engaged in the mutual fund industry.
AMFI undertakes all India awarness programme for investors inorder to promote proper understanding of the concept and working of mutual funds.
At last but not the least association of mutual fund of India also disseminate informations on Mutual Fund Industry and undertakes studies and research either directly or in association with other bodies.
1.1.13 The sponsorers of Association of Mutual Funds in India:
Bank Sponsored :
• • • •
SBI Fund Management Ltd. BOB Asset Management Co. Ltd. Canbank Investment Management Services Ltd. UTI Asset Management Company Pvt. Ltd.
GIC Asset Management Co. Ltd. Jeevan Bima Sahayog Asset Management Co. Ltd.
Private Sector: Indian:• • • • • • • • • •
BenchMark Asset Management Co. Pvt. Ltd. Cholamandalam Asset Management Co. Ltd. Credit Capital Asset Management Co. Ltd. Escorts Asset Management Ltd. JM Financial Mutual Fund Kotak Mahindra Asset Management Co. Ltd. Reliance Capital Asset Management Ltd. Sahara Asset Management Co. Pvt. Ltd Sundaram Asset Management Company Ltd. Tata Asset Management Private Ltd.
Predominantly India Joint Ventures:• • •
Birla Sun Life Asset Management Co. Ltd. DSP Merrill Lynch Fund Managers Limited HDFC Asset Management Company Ltd.
Predominantly Foreign Joint Ventures:• • • • • • • • • • •
ABN AMRO Asset Management (I) Ltd. Alliance Capital Asset Management (India) Pvt. Ltd. Deutsche Asset Management (India) Pvt. Ltd. Fidelity Fund Management Private Limited Franklin Templeton Asset Mgmt. (India) Pvt. Ltd. HSBC Asset Management (India) Private Ltd. ING Investment Management (India) Pvt. Ltd. Morgan Stanley Investment Management Pvt. Ltd. Principal Asset Management Co. Pvt. Ltd. Prudential ICICI Asset Management Co. Ltd. Standard Chartered Asset Mgmt Co. Pvt. Ltd.
1.1.14 Performance of Mutual Funds in India:
Let us start the discussion of the performance of mutual funds in India from the day the concept of mutual fund took birth in India. The year was 1963. Unit Trust of India invited investors or rather to those who believed in savings, to park their money in UTI Mutual Fund. For 30 years it goaled without a single second player. Though the 1988 year saw
some new mutual fund companies, but UTI remained in a monopoly position. The performance of mutual funds in India in the initial phase was not even closer to satisfactory level. People rarely understood, and of course investing was out of question. But yes, some 24 million shareholders was accustomed with guaranteed high returns by the begining of liberalization of the industry in 1992. This good record of UTI became marketing tool for new entrants. The expectations of investors touched the sky in profitability factor. However, people were miles away from the praparedness of risks factor after the liberalization. The Assets Under Management of UTI was Rs. 67bn. by the end of 1987. Let me concentrate about the performance of mutual funds in India through figures. From Rs. 67bn. the Assets Under Management rose to Rs. 470 bn. in March 1993 and the figure had a three times higher performance by April 2004. It rose as high as Rs. 1,540bn. .The performance of mutual funds in India suffered qualitatively. The 1992 stock market scandal, the losses by disinvestments and of course the lack of transparent rules in the whereabout rocked confidence among the investors. Partly owing to a relatively weak stock market performance, mutual funds have not yet recovered, with funds trading at an average discount of 1020 percent of their net asset value. At last to mention, as long as mutual fund companies are performing with lower risks and higher profitability within a short span of time, more and more people will be inclined to invest until and unless they are fully educated with the dos and donts of mutual fund.
GROSS FUND MOBILISATION (RS. CRORES) FROM TO
PUBLIC PRIVATE TOTAL
SECTOR SECTOR 01April98 01April99 01April00 0131March99 31March00 31March01 314,643 April01 01April02 01Feb.03 01April03 March02 13,613 1,46,267 1,64,523
31March- * 03 31March- 04 68,558 5,21,632 5,90,190 7,259* 58,435 65,694
31March1,03,246 7,36,416 8,39,662
05 31March- 06 1,83,446 9,14,712 10,98,158
1.1.15 MARKET TREND: A lone UTI with just one scheme in 1964, now competes with as many as 400 odd products and 34 players in the market. In spite of the stiff competition and losing market share, UTI still remains a formidable force to reckon with. Last six years have been the most turbulent as well as exiting ones for the industry. New players have come in, while others have decided to close shop by either selling off or merging with others. Product innovation is now passé with the game shifting to performance delivery in fund management as well as service. Those directly associated with the fund management industry like distributors, registrars and transfer agents, and even the regulators have become more mature and responsible. The industry is also having a profound impact on financial markets. While UTI has always been a dominant player on the bourses as well as the debt markets, the new generation of private funds which have gained substantial mass are now seen flexing their muscles. Fund managers, by their selection criteria for stocks have forced corporate governance on the industry. By rewarding honest and transparent management with
higher valuations, a system of risk-reward has been created where the corporate sector is more transparent then before. Funds have shifted their focus to the recession free sectors like pharmaceuticals, FMCG and technology sector. Funds performances are improving. Funds collection, which averaged at less than Rs.100bn per annum over five-year period spanning 1993-98 doubled to Rs.210bn in 1998-99. In the current year mobilization till now have exceeded Rs.300bn. Total collection for the current financial year ending March 2000 is expected to reach Rs.450bn. towards mutual funds has become obvious. The coming few years will show that the traditional saving avenues are losing out in the current scenario. Many investors are realizing that investments in savings accounts are as good as locking up their deposits in a closet. The fund mobilization trend by mutual funds in the current year indicates that money is going to mutual funds in a big way. The collection in the first half of the financial year 1999-2000 matches the whole of 1998-99. India is at the first stage of a revolution that has already peaked in the U.S. The U.S. boasts of an Asset base that is much higher than its bank deposits. In India, mutual fund assets are not even 10% of the bank deposits, but this trend is beginning to change. Recent figures indicate that in the first quarter of the current fiscal year mutual fund assets went up by 115% whereas bank deposits rose by only 17%. (Source: Thinktank, The Financial Express September, 99) This is forcing a large number of banks to adopt the concept of narrow banking wherein the deposits are kept in Gilts and some other assets which improves liquidity and reduces risk. The basic fact lies that banks cannot be ignored and they will not close down completely. Their role as intermediaries cannot be ignored. It is just that Mutual Funds are going to change the way banks do business in the future. PARTICULAR RETURN
MUTUAL FUND BETTER
RISK INVESTMENT OPTION NETWORK LIQUIDITY QUALITY OF ASSETS INTEREST CALCULATION
HIGH LESS HIGH PENETRATION AT A COST NOT TRANSPARENT MINIMUM BALANCE 10TH
BETWEEN OF EVERY
LOW MORE LOW BUT IMPROVING BETTER TRANSPARENT EVERY DAY
LOW RS 1LACK ON DEPOSIT NONE
Table 1.1 1.1.16 FUTURE OF MUTUAL FUND: Indian mutual fund industry reached Rs 1,50,537 crore by March 2004. It is estimated that by 2010 March-end, the total assets of all scheduled commercial banks should be Rs 40,90,000 crore. The annual composite rate of growth is expected 13.4% during the rest of the decade. In the last 5 years there is an annual growth rate of 9%. According to the current growth rate, by year 2010, Mutual fund India assets will be double.
100% growth in the last 6 years. Number of foreign AMC's are in the queue to enter the Indian markets like Fidelity Investments, US based, with over US$1trillion assets under management worldwide
Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required. We have approximately 29 mutual funds, which is much less than US having more than 800. There is a big scope for expansion.
'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities.
Mutual fund can penetrate rurals like the Indian insurance industry with simple and limited products. SEBI allowing the MF's to launch commodity mutual funds. Emphasis on better corporate governance. Trying to curb the late trading practices
• • •
The asset base will continue to grow at an annual rate of about 30 to 35 % over the next few years as investor’s shift their assets from banks and other traditional avenues. Some of the older public and private sector players will either close shop or be taken over. 1.2) ABOUT SPECIFIC AREA OF THE TOPIC CHOOSEN: 1.2.1 Investment management : Is the professional management of various securities (shares, bonds etc) assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds) . The term asset management is often used to refer to the investment management of collective investments, whilst the more generic fund management may refer to all forms of institutional investment as well as investment management for private investors. Investment managers who specialize in advisory or discretionary management on behalf of (normally wealthy) private investors may often refer to their services as wealth management or portfolio management often within the context of so-called "private banking".
The provision of 'investment management services' includes elements of financial analysis, asset selection, stock selection, plan implementation and ongoing monitoring of investments. Investment management is a large and important global industry in its own right responsible for caretaking of trillions of dollars, euro, pounds and yen. Coming under the remit of financial services many of the world's largest companies are at least in part investment managers and employ millions of staff and create billions in revenue. 1.2.2 Investment managers and portfolio structures: At the heart of the investment management industry are the managers who invest and divest client investments. A certified company investment advisor should conduct an assessment of each client's individual needs and risk profile. The advisor then recommends appropriate investments.
• ASSET ALLOCATION:
The different asset classes and the exercise of allocating funds among these assets (and among individual securities within each asset class) is what investment management firms are paid for. Asset classes exhibit different market dynamics, and different interaction effects; thus, the allocation of monies among asset classes will have a significant effect on the performance of the fund. Some research suggests that allocation among asset classes has more predictive power than the choice of individual holdings in determining portfolio return. Arguably, the skill of a successful investment manager resides in constructing the asset allocation, and separately the individual holdings, so as to outperform certain benchmarks (e.g., the peer group of competing funds, bond and stock indices).
• LONG TERM RETURN:
It is important to look at the evidence on the long-term returns to different assets, and to holding period returns (the returns that accrue on average over different lengths of
investment). For example, over very long holding periods (eg. 10+ years) in most countries, equities have generated higher returns than bonds, and bonds have generated higher returns than cash. According to financial theory, this is because equities are riskier (more volatile) than bonds which are themselves more risky than cash.
Against the background of the asset allocation, fund managers consider the degree of diversification that makes sense for a given client (given its risk preferences) and construct a list of planned holdings accordingly. The list will indicate what percentage of the fund should be invested in each particular stock or bond. The theory of portfolio diversification was originated by Markowitz and effective diversification requires management of the correlation between the asset returns and the liability returns, issues internal to the portfolio (individual holdings volatility), and cross-correlations between the returns.
1.2.3 Performance measurement:
Fund performance is the acid test of fund management, and in the institutional context accurate measurement is a necessity. For that purpose, institutions measure the performance of each fund (and usually for internal purposes components of each fund) under their management, and performance is also measured by external firms that specialize in performance measurement. The leading performance measurement firms (e.g. Frank Russell in the USA) compile aggregate industry data, e.g., showing how funds in general performed against given indices and peer groups over various time periods. In a typical case (let us say an equity fund), then the calculation would be made (as far as the client is concerned) every quarter and would show a percentage change compared with the prior quarter (e.g., +4.3% total return in US dollars)..
Generally speaking, it is probably appropriate for an investment firm to persuade its clients to assess performance over longer periods (e.g., 3 to 5 years) to smooth out very short term fluctuations in performance and the influence of the business cycle. An enduring problem is whether to measure before-tax or after-tax performance. Aftertax measurement represents the benefit to the investor, but investors' tax positions may vary.
• RISK ADJUSTED PERFORMANCE:
Performance measurement should not be reduced to the evaluation of fund returns alone, but must also integrate other fund elements that would be of interest to investors, such as the measure of risk taken. Several other aspects are also part of performance measurement: The need to answer all these questions has led to the development of more sophisticated performance measures, many of which originate in modern portfolio theory. Modern portfolio theory established the quantitative link that exists between portfolio risk and return. The Capital Asset Pricing Model (CAPM) developed by Sharpe (1964) highlighted the notion of rewarding risk and produced the first performance indicators, be they risk-adjusted ratios (Sharpe ratio, information ratio) or differential returns compared to benchmarks (alphas). The Sharpe ratio is the simplest and best known performance measure. It measures the return of a portfolio in excess of the risk-free rate, compared to the total risk of the portfolio. This measure is said to be absolute, as it does not refer to any benchmark, avoiding drawbacks related to a poor choice of benchmark. .Portfolio normal return may be evaluated using factor models. The first model, proposed by Jensen (1968), relies on the CAPM and explains portfolio normal returns with the market index as the only factor. It quickly becomes clear, however, that one factor is not enough to explain the returns and that other factors have to be considered.
1.3) ABOUT THE TOPIC: 1.3.1 MEANING: A mutual fund is a professionally-managed firm of collective investments that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. In a mutual fund, the fund manager, who is also known as the portfolio manager, trades the fund's underlying securities, realizing capital gains or losses, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding 1.3.2 DEFINITION: The SEBI regulations, 1993 defines a mutual fund as “a fund in the form of a trust by a sponsor, to raise money by the trustees trough the sale of units to the public, under one or more schemes, for investing in securities in accordance with these regulations” 1.3.3 CONCEPT OF MUTUAL FUND: A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund.
Mutual Fund Operation Flow Chart:
1.3.4 ENTITIES IN MUTUAL FUND OPERATIONS: In India, the following are involved in a mutual fund operations: the sponsor, the mutual fund, the trustees, the asset management company, the custodian, and the registrars and transfer agents. • Sponsor:
The sponsor of a mutual fund is like the promoter of a company. The sponsor may be a bank, a financial institution, or a financial service company. It may be indian or foreign. The sponsor is responsible for setting up and establishing the mutual fund. The sponsor is the settler of the mutual fund trust. The sponsor delegates the trustee fuction to the trustees. • Mutual fund :
The mutual funds constitued as a trust under the Indian trust act, 1881, and registered with SEBI.
A trust is a notional entity that cannot contract in its own name. so, the trust enters into contracts in the name of the trustees. Appointment by the sponsor, the trustees can be either individuals or a corporate body. Typically it is the latter. The trusees appoint the asset management company(AMC), secure necessary approval, periodically monitor how the AMC fuctions, and hold the properties of the various schemes in trust for the benefits of investors. • Asset Management Company:
It also reffered to as the investment manager, is a separate company appointed by the trustees to run the mutual fund. The AMC should have a certificate from sebi to act as portfolio manager under SEBI rules and regulations, 1993. • Custodian:
The custodian handles the investment back office operations of a mutual fund. It looks after the receipt and delivery of securities, collection of income, distribution of dividends, andsegregation of assets between schemes. The sponsor of a mutual fund cannot act as its custodian. • Registrars and transfer agents:
The registrars and transfer agents handle investor related services such as issuing units, redeeming units, sending fact sheets and annual reports, and so on. Some funds handle such fuctions in house, while others outsource it tobSEBI approved registrars and transfer agents like karvy and CAMS.The legal structure and organization of mutual funds as laid down by SEBI guidelines is as follows.
ORGANISATION OF MUTUAL FUND:
(COMPANY ,BANK) BORD TRUSEE POLICY RAISING. ASSET COMPANY MANAGEMENT ACTUAL IMPLIMENTATION OF THE POLICY AND INVESTMENT OPERATIONS. MAKING BODY FOR FUND OF
CUSTODIAN ACTING AS REGISTRAR, TRANSFER AGENT AND RELATED SERVICE FOR MUTUAL FUND.
1.3.5 Schemes of Mutual funds :
Types of mutual fund scheme:
(income,growth, &income and growth fund)
Investment based (equity, liquid, balanced funds)
Sector based (real estate, special, index-linked funds)
Leverage based Others Figure 1.3 (hedge and offshore funds)
1.3.5 Schemes according to Maturity Period OR by structure:
A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.
Open-ended Scheme: An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity. Close-ended Scheme: A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis. 1.3.6 Schemes according to Investment Objective: A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:
Growth / Equity Oriented Scheme:
The aim of growth funds is to provide capital appreciation over the medium to longterm. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. Income / Debt Oriented Scheme: The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. Balanced Scheme: The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds. Money Market or Liquid Fund: These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and interbank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.
Gilt Fund: These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes. Index Funds: Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc, these schemes invest in the securities in the same weightage comprising of an index. NAV’s of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme. Load Funds A Load Fund is one that charges a commission for entry or exit. That is, each time you buy or sell units in the fund, a commission will be payable. Typically entry and exit loads range from 1% to 2%. It could be worth paying the load, if the fund has a good performance history. No-Load Funds A No-Load Fund is one that does not charge a commission for entry or exit. That is, no commission is payable on purchase or sale of units in the fund. The advantage of a no load fund is that the entire corpus is put to work.
1.3.7 Sector Specific Schemes: These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. Special Schemes
Industry Specific Schemes
Industry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like InfoTech, FMCG, Pharmaceuticals etc.
Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50
Sectoral Funds are those, which invest exclusively in a specified industry or a group of industries or various segments such as 'A' Group shares or initial public offerings Tax Saving Schemes: These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme. 1.3.8 IMPORTANCE OR BENEFITS OF MUTUAL FUND: The mutual fund industry has grown at a phenomenal rate in the recent past. The following are some of the important advantages of mutual funds.
Channelizing savings for investment: A number of schemes are being offered by MFs so as to meet the varied requirements of the peoples and savings are directed towards capital investments directly. In the absence of MFs these savings would have remained idle.
Offering wide portfolio investment: Now the investors can enjoy the wide portfolio investment held by the mutual fund. The fund diversifies its risks by investing in large varieties of shares and bonds which cannot be done by small and medium investor. This is investors.This is in accordance with the maximum ‘not to lay all eggs in one basket
Providing better yields: Due to the large funds. Mutual funds are able buy cheaper and sell dearer than the small and medium investors. Thus they are able to the command better market rates and lower rates of brokerage. So they provide better yield to their customers .they also enjoy the economics of large scale and can reduce the cost of capital market participation
Redering expertise investment service at low cost: The management of the fund is generally assigned to professionals who are well trained and have adequate experience in the field of investment. Thus, investor are assured of quality services in there best interest. The intermediation fee is the lowest being 1% in the case of a mutual fund.
Providing research services: Each fund maintains large research team, which constantly analyses the companies and the industries and recommends the fund to buy or sell a particular share. Thus investment are made purely on the basis of a thorough research.
Offering tax benefits: Certain funds offer tax benefits to its customers. Thus, apart from dividend, interest and capital appreciation, investors also stand to get the benefit of tax concession. Under the wealth tax act, investments in MFs are exempted up to Rs. 5 lakhs.
Introducing flexible investment schedule: Some mutual funds are permitted the investor exchange their units from one schemes to another and this flexibility is a great boon to investors.
Providing greater affordability and liquidity: Even a very small investor can afford to invest in mutual funds. They provide an attractive and cost effective alternative to direct purchase of shares. Again there is greater liquidity. Units can be sold to the fund at any time at the net asset value and thus quick access to liquid cash is assured. Besides, branches of the sponsoring bank are always ready to provide loan facility against the unit certificates.
Simplified record keeping: The investor has to keep a record of only one deal with the mutual fund. Even if he does not keep a record, the MF sends statements very often to the investors.
Supporting capital market: The savings of the people are directed towards investments in capital market through these mutual funds. Mutual funds also provide a valuable liquidity to the capital market, and thus the market is made very active and stable.
Promoting industrial development: All industrial units have to raise their funds by resorting to the capital market by the issue of shares and debentures. The mutual funds not only create a demand for these capital market instruments but also supply a large source of funds to the market.
Diversification: The best mutual funds design their portfolios so individual investments will react differently to the same economic conditions. For example, economic conditions like a rise in interest rates may cause certain securities in a diversified portfolio to decrease in value. Other securities in the portfolio will respond to the same economic conditions by increasing in value. When a portfolio is balanced in this way, the value of the overall portfolio should gradually increase over time, even if some securities lose value.
1.3.8 Drawbacks of Mutual Funds: Mutual funds have their drawbacks and may not be for everyone:
No Guarantees: No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money.
Fees and commissions: All funds charge administrative fees to cover their day-today expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if you don't use a broker or other financial adviser, you will pay a sales commission if you buy shares in a Load Fund.
Taxes: During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made.
Management risk: When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers.
OPTIONS AND VALUE-ADDED SERVICES:
Thanks to the heightened competition in the mutual fund industry, mutual funds now offer various options and value-added services to attract and retain customers. • Options:
With respect to a number of schemes, mutual funds offer the following: dividend and growth options, systematic investment plan, and systematic withdrawal plan. i. Dividend and growth options When you join a scheme, you can shoose the dividend option or the growth option. Under the dividend option, the gains of the scheme are paid out at regular intervals in the form of dividends. Funds may offer daily, weekly, monthly, quarterly, half-yearly, and annual dividend options. ii. Under the growth option, investment gains are ploughed back into the scheme and no dividends are declared. Though the returns from both the dividend and growth options will be the same, the tax implications may be different. iii. Systematic investment plan Under the systematic investment plan (SIP), the investor can invest regular sums of money every month to buy units of a mutual fund scheme. As the investment is made regularly, the investor buys more units when the price is low and fewer units when the price is high. iv. Systematic withdrawal plan A systematic withdrawal plan (SWP) works like a systematic investment plan in the opposite direction. The SWP allows the investor to withdraw a fixed amount every month.
8.2 Value-added services :
Mutual funds offer value-added services like redemption over phone, triggers and alerts, cheque book facility, and new points of purchase. i. Redemption over phone Prudential ICICI for example offers investors the facility of making a redemption request or switch between schemes over the phone. ii. Cheque book facility Fund houses take few days to process a redemption request and then further time is lost when the redemption cheque is in transit. To cut down this
delay, some fund houses give investors in certain schemes (typically debt scemes), the some limit, at the time of investment itself. Encashment of the cheque is deemed as withdrawal, at the scheme’s NAV on the day the cheque is deposited.
1.3.9 HOW TO PICK UP CHOOSEN ONE: There are few tips which helps the investors to choose right fund. • The fund offering: Investors having wide range of offering to choose from different fund each fund is a distinct offering, pick the one that suits your risk – appetite and profile the best. • The fund’s performance: The return clocked by a fund are an important parameter to judge its worth as an investment avenue, while the fund’s return are historical in nature. It serves as an indicator of what the fund is capable of performing.
The fund manager/management style: The fund manager and his approach to fund management play a vital role in determining the fund’s success or otherwise. Evaluate the fund manager’s past track record in the schemes he manages.
Portfolio management: The fund’s portfolio can reveal a lot about the fund. Ideally a fund should display a high degree of consistency in its holdings; similarly the portfolio should be a well-spread one.
Risk-adjusted return and volatility: We havw discussed about importance of a fund’s performance i.e. the return it has delivered; however, the fund showing on the risk-adjusted return front is vital as well. A higher sharp ratio is indicative of the fact that the fund has adequately compensated its investors for risk borne.
Expense ratio and load: Expenses incuured by the fund have a significant impact on its performance. The expenses are incurred for a variety of reasons ranging from management fees to marketing and selling expenses. Similarly entry/exit load are vital too. An entry load reduces the amount invested proportionately and only the balance is utilized for generating returns.
The fund house: The fund house is an important entity and due attention must be to it as well. Investors comfort levels would surely be higher if the fund house is a reputed one has a history of producing funds that have superior returns.
Seek advice: Utilize the services of a financial planner before making investments in mutual funds. A financial planner will help you create a portfolio comprising of schemes that are “right” for you.
The PMS option: Investors who have a large investible surplus can explore the option of utilizing a portfolio performance management services (PMS) can be explored. The right investment plan an important role in enabling you to achieve you financial goals and objectives.
CHAPTER TWO: RESEARCH DESIGN: 2.1. Introduction: Research refers to a search for knowledge. The advanced learner’s dictionary of current english lays down the meaning of research as “ a careful investigation or enquiry specially through search for new facts in any branch of knowledge.” Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying how research is done scientifically. In it we study the various steps that are generally adopted by a research in studying his research problem along with the logic behind them. It is necessary for the researcher to know how to develop certain indices or tests, how to calculate the mean, the mode, the median or the standard deviation or chi-suare, how to apply particular research technique, but they also need to know which of these methods or techniques, are relevant and which are not, and what would they mean and
indicate and why. Researchers also by which they can decide that certain techniques and procedures will be applicable to certain problems and other will not. All this means that it is necessary for the researcher to design his methodology. The research methodology has wider dimension and wider scope than that of research methods. Thus, when we talk of research methodology we not only talk of research methods but also consider the logic behind the methods we use in the context of our research methods but also consider the logic behind the methods we use in the context of our research study and explain why we are using a particular method or technique and why we are not using other so that research results are capable of being evaluated either by the researcher himself or by others. 2.2 Review of literature: A research should be preliminary orientation and background knowledge about the topic and he should collect the basic concept and information regarding the final in which the topic includes due to this reasons review of the literature has an important role in research study. Considering the importance of mutual funds, several academicians have tried to study the performance of various funds. Initially, their studies have focused on timing and investment abilities of fund managers. Later, several researchers have tried to study the various factors and their impact on fund performance. These factors include potential measurement errors from survivorship bias and misspecification of the benchmark, the impact of fund expenses and economies of scale, to the personal characteristics of fund managers. Various studies that focused on factors such as the ability of fund managers to consistently outperform the market and the fund specific organizational and managerial aspects, came out with contradictory conclusions. Jenson’s (1968) study on mutual fund performance of 115 funds over a period spanning from 1945 60 1964, confirmed the efficient market hypothesis. His analysis has shown that the performance of expense-adjusted fund returns was markedly lower than those randomly chosen portfolios of a similar risk category. These results were in sync with the findings of Treynor 91965) and Sharpe (1966). Performance of professionally managed funds also was not any better than the performance of risk-adjusted index portfolio, which also indicated that managers of these funds did not appear to possess private information. Thus, the results of the early studies prevailed as general conclusions in the erstwhile literature.
However, a number of later studies on the topic, nonetheless, go against the early findings. For instance, a study by Ippolity (1993) found mutual fund returns after expenses (before loads) to be superior than the returns offered by risk-adjusted market indices, which indicated that mutual fund managers may have access to the useful private information. Thus, the mutual fund managers may produce such excess returns that can offset the expenses of the fund. Further studies by Grinblatt and Titman (1992), Hendricks, Patel and Zeckhauser (1993), Goetzmann and Ibbotson (1994), and Volkman and Wohar (1995) were in support of market efficiency as they discovered instances of repeated winners amongst fund managers. Recently, Wermers (2000) decomposed mutual fund returns into a stock picking talent; features of stockholding and trading costs and expenses. The decomposition helped him show that stock picking of funds, in fact, enabled the managers to cover their costs. Other studies by Elton, Gruber, Das and Hlavka (1993), Malkiel (1995) and Carhart (1997) reinforce the early conclusion of Jensen (1968). While doing away with survivorship bias, carhart (1997) has shown that the common factors that drive stock returns are responsible for consistency in mutual fund performance. On the other hand the Malkiel (1995) study considers both benchmark errors and survivorship bias and concludes that the previous results indicating market inefficiency were affected by these factors. 2.3 Statement of the problem: “ A study on Analysis of the performance of mutual fund with reference to mutual fund industry.” 2.4. Scope of the study: The study of mutual fund has the wider scope. Mutual fund is a professionally managed form of collective investment that pools money from many investors and invest it in stocks, bonds, short-term money market instruments and other securities. Mutual fund distributors of tax free municipal bonds income are also tax free to the share holders. Taxable distribution can be either ordinary income or capital schems which are equity schemes , debt and hybrid schems.
The present study includes five-year return of the mutual fund companies and funds in India. Out of all mutual fund companies we have selected only two companies those are ING mutual fund and HDFC mutual fund, and only those schemes and funds are included in this study, which are performed well during from last few years. The schemes covered under the study are: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. ING domestic opportunities fund. ING selected stock fund. INg dividend yield fund. ING nifty plus fund. ING L.I.O.N fund . ING Tax saving fund. HDFC Growth fund. HDFC Equity fund. HDFC top 200 fund. HDFC Capital builder fund. HDFC index fund(Sensex plan). HDFC Index fund(Nifty plan).
To evaluate the performance of schemes and funds, the researcher applied Sharpe Index, Treynor Index and Jensen’s Alpha measure.
2.5. Objectives of the problem: The major objectives of study are as follows. To evaluate investment performance of mutual funds in terms of risk and return. To examine the funds sensitivity to the market fluctuations in terms of beta. To find out the financial performance of mutual fund schemes. To appraise investment performance of mutual funds with risk adjustment, the theoretical parameters as suggested by Sharpe, Treynor and Jensen.
To analyze the performance of various schemes of mutual funds. To identify the sector where the mutual fund and how invested. To provide valuable suggestions and recommendations.
2.6. Methodology: Methodology is a way to systematically solve the research problem. It may be understood as a science of studying how research is done scientifically. In it we study the various steps that are generally adopted by a research in studying his research problem along with the logic behind them. Methodology refers to methods adopted to carry out the research and steps adopted to solve the problem finding solution 2.6.1 Type of the study: • Descriptive study: The type of the study or research used in this project is a descriptive research design. It mainly involves surveys and facts findings enquiries of different kinds. The main objective of descriptive research is to describe the state of affairs as it exists at present. The major purpose of descriptive research is a description of the state of the affairs, as it exists at present. Thus a descriptive study is a fact finding investigation with adequate interpretation. It is the simplest type of research. It focuses on particular aspects or dimensions of the problem studied. It is designed that it gathers descriptive information and provides information for formulating more sophisticated studies. There is a cause effective relationship.
The criteria for selecting this particular design are that, the problem of the project must be described and not arguable. The data collected is amenable to statistical analysis and has accuracy and significance. It is possible to develop to valid standards of comparison. It tends itself to the verifiable procedure of collection and analysis of data. Descriptive study objective aim at identifying the various characteristics of a company problem under study. It can reveal potential relationships between variables with exploratory research.
Type of data: Secondary data: The data which is used for the research is secondary data. The secondary data is the data which is duplicate of primary data. “The data (published or unpublished) which have already been collected and processed by some agency or person and taken over from there and used by any other agency for their statistical work are termed as person and taken over from there and used by any other agency for their statistical work are termed as secondary data” as far as second agency is concerned. The second agency if and when it publishes and files such data becomes the secondary source to anyone who later uses these data. In other words secondary source is the agency who publishes for use by others the data which was not originally collected and processed by it.
Sources of data: Unpublished sources:
The data can be governments or private offices can be collected from these are unpublished data.
The research work, the secret documents. Published sources:
Central and state government publication publishes the various statistics like crop production, population, statistic, wages expenses.
The commerce association, commerce and trade association, Indian chamber of commerce federation are publishes several data.
News paper, journals, periodicals etc. publishes the several data. Some private organization, research berceuse, universities publishes several data’s.
Periodicals: ICFAI journals Internet: google.com Value research online.com Nytimes.com AMFI.com News papers: financial express Company journals: Factsheets of ING investment and HDFC. 2.7 Tools for analysis:
2.7.1 Standard deviation: It is used to measure the variation in individual returns from the average expected return over a certain period. Standard deviation is used in the concept of risk of a portfolio of investments; higher standard deviation means a greater fluctuation in expected return. 2.7.2 Beta: Beta measures the systematic risk and shows how prices of securities respond to the market forces. It is calculated by relating the return on a security with return for the market. By convention, market will have beta 1.0 Mutual fund is said to be volatile, more volatile or less volatile. If beta is greater than 1 the stock is said to be riskier than market. If beta is less than 1, the indication is that stock is less risky in comparison to market. If beta is zero then the risk is the same as that of the market. Negative beta is rare. 2.7.3 Sharpe index:
Sharpe index measures risk premium of a portfolio, relative to the total amount for risk in the portfolio. Sharpe index summarizes the risk and return of a portfolio in a single measure that categorizes the performance of funds on the risk-adjusted basis. The larger the Sharpe Index, the portfolio over performance the market and vice versa.
Portfolio Average Return (R ) – Risk Free Rate of Interest (R ) p t Standard Deviations of the Portfolio Return
Sharpe Index =
2.7.4 Treynor’s Index :
Treynor’s model is on the concept of the characteristics straight line. The characteristics line has drawn a relationship between the market return and a specific portfolio without taking into consideration any direct adjustment for risk. It is also known as reward to volatility ratio and is defined as:
Portfolio Average Return (R )-Risk Free Rate of p Interest (R ) t Beta Coefficient of Portfolio
Jensen Measures: It measures the difference between market risk and actuel performance of the fund. JM = Average return of the portfolio – SML
2.8 Limitations of the study: The study also has the some limitations which are as follows: The study is restricted to secondary data only The time is the main constraint so limited period of time is spent on this study. The support from the management side may be limited due to their pre occupied meetings and work.
Not possible to get whole information because of their business secret and lack of
awareness among people. Mutual fund industries are so developed as compared to stock market.
2.9. CHAPTER SCHME:
Chapter NO. 1 2 3 4 5
Contents Introduction Research Design Profile of the organization Analysis and interpretation of data Summary suggestions. of findings, conclusion and
CHAPTER THREE: 3.1 PROFILE OF THE INDUSTRY: The Indian mutual fund industry has evolved over distinct stages. The growth of the mutual fund industry in India can be divided into four phases: Phase I (1964-87), Phase II (19871992), Phase III (1992-1997) and Phase IV (beyond 1997). Mutual fund industry started in India with the establishment of Unit Trust of India (1964), which was the only player in the mutual fund industry up to 1987. In 1987, the government permitted public sector banks and financial institutions to join the fray. From 1993 onwards the industry was opened up for private participation. Thus, private and foreign players have started setting up mutual funds in India. Today, mutual funds are one of the fast-growing sectors in India. The Indian Mutual Fund industry has grown tremendously in the last decade. There are 29 mutual funds as on March 31st, 2005 with Assets under Management (AUM) of rs. 1,49,600 cr (Table1). AUM crossed Rs. 1,00,000 cr during the year 1999-2000 recording a growth rate fo 65%. Besides, a vast majority of equity schemes outperformed the market. The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by UTI in the year 1963. The main reason of its poor growth is that the mutual fund industry in India is new in the country. Large sections of Indian investors are yet to be intellectuated with the concept. Hence, it is the prime responsibility of all mutual fund
companies, the up with condition to market the product correctly abreast of selling. The mutual fund industry can be broadly put into four phases according to the development of the sector. Each phase is briefly described as under. 3.1.1 First Phase – from 1964-87: Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI totally had Rs.6,700 crores of assets under management.
3.1.2 Second Phase - 1987-1993 (Entry of Public Sector Funds): Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund of (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC in 1989 and GIC in 1990. The end of 1993 marked Rs.47,004 as assets under management. 3.1.3 Third Phase - 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI and (MutualFund)Regulations1996. The number of mutual fund houses went on increasing, with many foreign mutual funds
setting up funds in India and also industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds. 3.1.4 Fourth Phase - since February 2003 This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as on January 2003). The Specified Undertaking of Unit Trust of India, functioning under an and administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is with registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of AUM and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund can industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.
3.2 The major players in the Indian Mutual Fund Industry are: GROWTH IN ASSETS UNDER MANAGEMENT:
STRUCTURE OF MUTUAL FUND INDUSTRY IN INDIA:
MUTUAL FUND INDUSTRY
ASSOCIATION OF MUTAUL FINDS
BOARD OF TRUSTEES
ASSET MANAGEMENT COMPANY
PRIVATE SECTOR FI SPONSORED
BANKS SPONSORE D
MUTUAL FUND SCHEMES
3.3 Rating of Mutual fund schemes in mutual fund industry: Mutual fund schemes are periodically evaluated by independent institutions. CRISIL, Value Research India, and Economic Times are three such institiutions whose rankings or evaluations are currently very popular. CRISIL Credit Rating nd Information Services of India Limited (CRISIL) carries out Composite Performance Rankings that cover all open-ended schemes that disclose their entire portfolio composition and have NAV information for at least two years. It currently ranks schemes in five categories, viz., Equity Schemes, Debt Schemes, Gllit Schemes, Balanced Schemes, and Liquid Schemes. Its ranking is based on four criteria, viz., risk-adjusted return of the scheme’s NAV, diversification of the portfolio, liquidity, and asset size. The weights assigned to these criteria vary from category to category.within each category, the top 10 percent are considered vbery good, thenext 20 percent good, the next 40 percent average, the next 20 percent below average, and the last 10 percent poor. Value research India like CRISIL, value research India rates schemes in different categories. Each scheme is assigned a risk grade and a return grade and a composite measure of performance is calculated by subtracting the risk grade from the return grade. Within each category, the top 10 percent are consideree five star, the next 22.5 percent four star, the next 35 percent three star, the next 22,5 percent two star, and the last 10 percent one star. 3.4 Some facts for the growth of mutual fund industry in India:
100% growth in the last 6 years. Number of foreign AMC's are in the que to enter the Indian markets like Fidelity Investments, US based, with over US$1trillion assets under management worldwide.
Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required.
We have approximately 29 mutual funds which is much less than US having more than 800. There is a big scope for expansion.
'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities.
Mutual fund can penetrate rurals like the Indian insurance industry with simple and limited products.
• • • •
SEBI allowing the MF's to launch commodity mutual funds. Emphasis on better corporate governance. Trying to curb the late trading practices. Introduction of Financial Planners who can provide need based advice.
3.5 FOLLOWED BY THAT OF COMPANY Here in this project we considered two companies for analysis part ING Investment pvt.ltd. (ING Group) and HDFC mutual fund(HDFC GROUP)
3.5.1 ING Group management structure: ING Vysya Mutual Fund: ING Vysya Mutual Fund was setup on February 11, 1999 with the same named Trustee Company. It is a joint venture of Vysya and ING. The AMC, ING Investment Management (India) Pvt. Ltd. was incorporated on April 6, 1998.
ING Group is known for its philosophy of 'keeping it simple' covering some 60 million private, corporate and institutional clients in 50 countries. It is the world's fourth largest financial services group.
ING Vysya Mutual Fund aims to provide investors with the most practical and secure investment opportunities to invest their valuable savings. This is combined with a range of innovative options to deliver healthy returns combined with a high degree of security. Currently, the fund offers four equity, five debt and two hybrid schemes to its investors.
3.5.2 ING Investment Management: In India ING Investment Management (I) Pvt Ltd has an investor base of over 1,52,677 with Rs. 5080.97 crores as of June 30th, ’07 (SOURCE: WWW.AMFIINDIA.COM ). With a presence in 34 locations, we currently manage 21 schemes. ING Investment Management (I) Pvt Ltd has been associated with innovation and responsive adaptability with sharp minds at work. ING Investment Management has sealed a position of strength and is considered as one of the top contenders to challenge the market leaders. ING Investment Management has enjoyed many firsts and has always maintained a pioneering outlook. A few achievements are highlighted below:
First Investment Manager to launch a packaged concept in Asset Management Industry. Awarded “Abby Gold 2006” for its advertising Campaign for ING LION Fund. Two CRISIL AAAf * products in Debt Fund space. (ING Liquid Fund & ING Floating Rate Fund). First Asset Manager to launch a debt fund based on Credit risk with a portfolio based on credit monitor. (ING Select Debt Fund). First Private Sector Mutual Fund to launch a concept dedicated to women. (Mahilanivesh) ING Dynamic Asset Allocation Fund was awarded “Most Innovative Product” by Asia Asset Monitor. ING Mutual Fund recently launched India’s first DAILY TRANSFER PLAN called Zoom Investment Pac (ZIP). ING Mutual Fund has also pioneered a new reality show on television called Indian Investor of the Year.
* The assigned rating of AAAf is valid only for ‘ING Floating Rate Fund’ and ‘ING Liquid Fund’. The rating of the fund is not an opinion of the asset management company’s willingness or ability to make timely payments to the investor. The rating is also not an opinion on the stability if the NAV of the fund, which could vary with market developments.
Financial markets: ING Vysya Bank Financial Markets is a leading player in the Indian Financial Markets providing one of the widest ranges of products for large corporate, small and medium enterprises as well as individual needs. Supported by state-of-the-art systems and the capabilities of the ING Group, we offer competitive pricing and efficient execution across markets and a comprehensive suite of products.
Wholesale banking: Wholesale Banking is a reflection of ING Vysya Bank's ability to provide its corporate clients in India a full range of commercial, transactional and electronic banking products. The bank offers a wide array of client-focused corporate banking services, including working capital finance, trade and transactional services, foreign exchange and cash management, to name a few. Isnvestment banking, local debt syndication and securitization: The bank is uniquely positioned to be able to advise, lead manage and place, thus giving the customer the advantage of being a full fledged Commercial Bank along with investment banking. As a Category I merchant banker registered with SEBI, the bank has an advanced product portfolio that includes the following. Financial advisory service: for mergers and acquisitions, capital and debt structuring and restructuring, private capital raising and structured financing. This includes onshore as well as offshore. Local debt distributin: both in loan and bond forms, including plain vanilla debt and structured dedt. Securitization: We advise our clients on securitising their assets with a view to sell them. Our services include advisory, structuring portfolios, assist in obtaining ratings for the portfolios & sell-down of the portfolio. investment banking services are provided to a range of Indian as well as offshore clients. For cross border transactions involving global clients, the investment-banking group works closely with ING Bank's global corporate finance and investment banking office.
Trade finance and commodities: As an innovative solution provider of international and domestic trade flows of our clients, we offer an entire range of trade finance products. The product suite, offered in close coordination with the ING global network of structured trade finance units includes documentary credit, guarantees, bills/ invoices discounting, supply chain financing, pre/postexport finance and structured commodity finance. Letter of credit: letter of credit facilities (inland/ foreign) are provided to the customers for meeting working capital requirement needs as well as for capital requirements purchases. Bill Discounting: Bill discounting involves financing of short-term trade receivables through negotiable instruments/ invoices discounting. This has gained considerable importance in recent past in view of self-liquidating in nature. Supply chain financing: SCF refers to trade credit extended by the Bank to partners involved in comprehensive supply chain process (commodities to cash) commencing from conversion of raw material into parts/ components, consumed by big manufacturers and thereafter sold to ultimate consumers through dealers. Core objective is to provide integrated financial solution to the supply and distribution channels of our corporate clients. Export credit: ING Vysya provides extensive export credit for pre-shipment and postshipment requirements of exporter borrowers in rupees and foreign currencies. We also arrange discounting of bills under export LCs by overseas banks at competitive pricing with/ without recourse to the exporters. Private banking: believe that trust can be built over time by continuously providing quality advice to our customers."-Michel Tilmant, Chairman, ING Group Welcome to ING Vysya Bank, Private Banking Division. Our integrated global business in insurance, asset management and banking enables us to offer clients innovative financial solutions few others can match. ING Asia Private Banking has been ranked as # 1 for Best quality advice in the Asia Money 2007 survey amongust clients with AUM exceeding 25 million. Accounts and deposits: • Rupee savings accounts
NRE and NRO savings accounts NRE and NRO current accounts
Foregn currency deposit: Earn Indian Interest Rates on your Foreign Currency deposits with our Foreign Currency Non-Resident deposit. 3.5.2 HDFC GROUP: The housing development finance corporation (HDFC) was amongst the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part of the RBI's liberalisation of the Indian Banking Industry in 1994. The bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank in january 1995. HDFC Mutual Fund: HDFC Mutual Fund was setup on June 30, 2000 with two sponsorers nemely Housing Development Finance Corporation Limited and Standard 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 the Standard Life Group and is owned 100% by The Standard Life Assurance Company. With global assets under management of approximately US$126 billion as at May 15, 2003, Standard Life Investments Limited is one of the world's major investment companies and is responsible for investing money on behalf of five million retail and institutional clients worldwide. The Trustee Company of HDFC Mutual Fund is HDFC Trustee Company Limited and AMC is HDFC Asset Management Company Limited, incorporated with the SEBI on December 10,1999. The products of HDFC Mutual Fund are as follows:
Balance Funds Debt Funds
Apart from this it also provides the following value added services:
• • •
SIP (Systematic Investment Plan) STP (Systematic Transfer Plan) SWAP (Systematic Withdrawal Advantage Plan)
HDFC Bank : (NYSE: HDB), one amongst the firsts of the new generation, tech-savvy commercial banks of India, was incorporated in August 1994, after the Reserve Bank of India allowed setting up of Banks in the private sector. The Bank was promoted by the Housing Development Finance Corporation Limited, a premier housing finance company (set up in 1977) of India. Net Profit for the year ended March 31, 2006 was Rs. 1,141 crores. Results of the latest quarter ended June 2007, indicate that the bank continues to grow in a steady manner. HDFC bank also have the different banking fuction: • • • Personal banking Wholesale banking NRI banking
Branch network: Currently HDFC Bank has 753 branches, 1,716 ATMs, in 320 cities in India, and all branches of the bank are linked on an online real-time basis. The bank offers many innovative products & services to individuals, corporates, trusts, governnments, partnerships, financial institutions, mutual funds, insurance companies. It is the pathbreaker in the indian banking sector. HDFC PRODUCT RANGE:
HDFC Bank India provides the following range of products:
• • • • • • • •
Savings Account HDFC Bank Preferred Sweep-In Account Super Saver Account HDFC Bank Plus Demat Account HDFC Mutual Fund HDFC Standard Life Insurance
HDFC India innovative services
• • • • • • •
HDFC Phone Banking HDFC ATM HDFC Inter-city/Inter-branch Banking HDFC Net Banking HDFC International Debit Card HDFC Mobile Banking HDFC Bill Pay
HDFC Bank Loans
• • • • •
HDFC Personal Loan HDFC New Car Loan and Used Car Loan HDFC Loan Against Shares HDFC Two Wheeler & Consumer Loan HDFC Home Loan
3.3 SPECIFIC DEPARTMENT WHICH YOU STUDIED: 3.3.1 Investment service department: The Department provides investor needs and aftercare to both new and existing foreign and citizen enterprises through its One Stop Service Centre (link to How can we help you). This facility operates with liaison officers from various government and parastatal institutions that have a direct bearing in providing services to investors. The main focus of activity is to enable investors in the manufacturing and services sectors to secure all clearances and approvals necessary to set up and operate business in the country from under one roof. The assistance provided includes company registration, operating licenses, visitors visa, residence and work permits as well as infrastructural facilities such as land, factory buildings, utilities, social prerequisites, power and telephone connections. The Department literally takes the investor by the hand and helps them walk through all formalities until the business is established. Thereafter, investors are paid periodic visits which enable interactions necessary to preempt any difficulties that they may encounter in their day to day operations. 3.3.2 INVESTOR SERVICES All share transfers and related operations have so far been conducted in-house by Hindustan Lever's Investor Service Department, which is registered with the SEBI as a Category 2 Registrar. It is a well equipped department which endeavours to provide efficient and timely services to its shareholders in share transfers and related operations. The Company has evaluated the option of outsourcing the investor service function in order to add further value and to overcome certain limitations like not being able to service shareholders directly across the counter at various places across the Country where the shareholders are based. After a careful evaluation, the Company has come to the conclusion that it will benefit the shareholders if the investor service function is outsourced to an outside agency which has in addition to specialised expertise, better infrastructure to serve the
investors across the Country. Accordingly, it has been decided that the share registration and allied operations relating to the equity shares of the Company will be outsourced to Karvy Computershare Private Limited (Karvy) who are Category I Registrars & Transfer Agents registered with SEBI and possess almost 20 years experience in handling share registry operations. Karvy serves over 250 corporate clients and renders service to an investor base of over 16 million. It is the largest Registrar & Share Transfer Agents in the Country and serves the investors through its 193 branches across 135 cities. The Company has appointed M/s.Karvy Computershare Private Limited (Karvy) as Registrars and Transfer Agents with effect from 1st July,2004. We are happy to inform you that all requisite steps in connection with shifting the investor service operations from Company's office at Navi Mumbai to Karvy's central office at Hyderabad have been completed and Karvy is fully operational in respect of the Company's share registry work with effect from 16th July,2004. Accordingly all operations/correspondence relating to share transfers and allied operations e.g. demat, change of address, request for issue of duplicate share certificates, exchange of merged Company's shares, transmission of shares, payment of dividend etc., will be handled by Karvy and not by Company's office at Navi Mumbai wih effect from 16th July ,2004. You are, therefore, requested to send all documents/correspondence in relation to the above to Karvy at the following address after the said date: 3.4 DISCUSSION ABOUT THE PRODUCTS THEY PRODUCE IS
DESIRABLE: ING domestic opportunity fund:(an open ended equity scheme) Objective: to provide long-term capital appreciation from a portfolio that is primarily invested in companies, which derive significant propotion of their revenue from domestic Indian market place/economy. In case adequate investment opportunities are not available due to valuation considerations etc, amongst the primary investment opportunities amongst the general investment universe. ING select stock fund (an open ended growth scheme)
Objective: to provide long term capital appreciation from a portfolio that is invested predominately in equity and equity related securities.
ING dividend yield fund :( an open ended equity scheme) Objective: to provide medium to long term capital appreciation and / or dividend distribution by investing predominantly in equity and equity related instruments, which offer high dividend yield. ING midcap fund :( an open ended equity scheme) Objective: an open-ended scheme, seeking to provide long-term growth of capital at controlled level of risky by investing primarily in midcap stocks. The level of risk is somehow what higher than a fund focused on large and liquid schemes. ING L.I.O.N. :( Open ended diversified equity scheme) Objective: it seeks to provide medium to long-term capital appreciation by investing in stocks across the entire market capitalization. ING nifty plus fund :( an open ended indexed equity scheme) Objective: the objective of fund is to invest in companies whose securities are included in the S&P CNX Nifty index. ING tax saving fund :( an open ended indexed equity savings scheme) Objective: to generate medium to long-term growth of capital along with income tax rebates ING ATM (against money market): (open-ended diversified equity scheme) Objective: to generate capital appreciation from a diversified portfolio of equity and equity related instruments by investing in the stock of companies, which are financially sound but are undervalued.
ING C.U.B (competitive upcoming businesses): (open-ended balanced scheme) Objective: seeking to provide long-trm capital appreciation by investing predominantly in a diversified portfolio of equity and equity related securities of companies of small market capitalization. ING Dynamic asset: Objective: the primary investment objective of scheme is to seek to generate capital appreciation by actively investing in equity/ equity related securities. The scheme may invest in debt, money market instruments, to the extent permitted under the regulations. Exposure to debt securities would be in line with the fund manager’s caution on the equity market. In case of –ve view on equity markets the fund manager may choose to have 100% allocation to debt securities. ING liquid fund: Objective: to provide reasonable returns while providing a high level of liquidity and low risky by investing primarly in money market and debt securities. The aim is to optimize returns while providing liquidity. ING liquid plus fund: Objective: The scheme would aim to provide an investment avenue for investors preferring good liquidity and an investment horizon of 2 to 6 months. The scheme would be able to achieve its objectives by investing in a portfolio of money market and debt instruments. ING liquid call fund:
Objective: The aim is to optimize returns and take advantage of phases of high overnight rates and inverted curves while providing liquidity . ING floating rate fund: Objective: the primary objective of scheme is to provide income consistent with the prudent risk from a portfolio comprising substantially of floating rate instruments. Under normal circumstances 65% of corpus will be invested in floating rate instruments and upto 35% in fixed rate instruments. ING income fund: Objective: to generate attractive income by investing in a diversified portfolio of debt and money market instruments of varying maturities, and at the same time provide continuous liquidity along with adequate safety. ING select debt fund: Objective: To generate income by investing in higher yielding fixed income securities by maintaining a higher expose in AA rated securities and money market instruments of varying maturity dates with view to maximize income while maintaining optimum balance of yield, safety and liquidity. ING Gilt fund: Objective: The primary objective of the scheme is to generate relatively risk free return by investing in sovereign instruments issued by the central/state government as defined u/s of public debt act 1944. The scheme will not make investment in any other type of security such shares, debentures etc. ING MIP Fund plan-A and ING MIP Fund plan-B Objective: The primary objective of the scheme is to generate regular income by investing in diversified portfolio of debt and money market instruments of
varying maturities and at the same provide continuous liquidy along with adequate safety. Under plan B the scheme will also seek to generate capital appreciation by investing a smaller portion of corpus in equity and equity related securities. ING Global Real Estate fund: Objective: The primary aim of the scheme is to seek capital appreciation by investing predominantly in ING Global Real Estate Securities Fund. The scheme may invest a certain portion of its corpus in money market instruments in order to meet liquidity. HDFC MUTUAL SCHEMES: HDFC Growth fund: Objective: To generate long term capital appreciation from a portfolio that is predominantly invested equity and equity related instruments. HDFC Equity fund: Objective: To achieve capital appreciation. HDFC Top 200 schemes: Objective: To generate long term capital appreciation from a portfolio of equity and equity related instruments primarily drawn from the companies in BSE 200 index. HDFC Capital Builder fund: Objective: To achieve capital appreciation in long term. HDFC Core & Satellite Fund: Objective: To generate capital appreciation through equity investment in companies whose shares are quoting at prices below their true value.
HDFC Premier Multi-Cap fund: Objective: To generate capital appreciation in long term through equity
investment by investing in a diversify portfolio of MidCap and Large Cap ‘blue chip’ companies. HDFC Index fund: Objective: Nifty plan: to generate returns those are commensurate with the performance of nifty, subject to tracking errors. Sensex plan: to generate returns those are commensurate with the performance of nifty, subject to tracking errors. Sensex Plus Plan: to invest 80 to 90% of the assets of the plan in companies whose securities are included in sensex and between 10 to 20% of the net assets in companies whose securities are not included in the sensex. HDFC Arbitrage fund: Objective: To generate income through arbitrage opportunities between cash and derivative segment and by deployment of surplus cash in debt securities and money market instruments. HDFC Children’s gilt fund: Objective: To generate long term capital appreciation. HDFC Balanced fund: Objective: To generate capital appreciation along with current income from a combined portfolio of equity, debt and money market instruments. HDFC Prudence Fund:
Objective: To provide periodic returns and capital appreciation over a long period of time from a judicious mix of equity and debt to minimize capital erosion.
HDFC Long Term Advantage fund: Objective: To generate long term capital appreciation from a portfolio that is predominantly invested equity and equity related instruments. HDFC Tax Saver: Objective: To achieve long term growth of capital. HDFC MF Monthly Income Plan: Objective: To generate the regular return through investment primarily in debt and money market instruments. HDFC Multiple Yield Fund: Objective: To generate positive returns over medium time frame with low risk of capital loss over medium time frame. HDFC Income Fund: Objective: To optimize returns while maintaining a balance of safety, yield and liquidity. HDFC High Interest Fund (HHIF) Objective: To generate income by investing in a range of debt and money market instruments of various maturity dates with a view to maximize income with safety, yield and security.
HDFC Short Term Plan (STP): Objective: To generate regular income through investment in debt securities and money market instruments.
HDFC Liquid Fund (HLF): Objective: To enhance income consistent with a high level of liquidity, through a judicious portfolio mix comprising of money market and debt instruments. HDFC Cash Management Fund: Objective: Savings and call plan. HDFC Floating Rate Income Fund: Objective: To generate regular income through investment in a portfolio comprising substantially of floating rate debt/money market instruments, fixed rate debt/ money market instruments swapped for floating rate return and fixed rate debt securities and money market instruments. HDFC Gilt Fund: Objective: To generate credit risk-free return through instruments in sovereign securities issued by the central government and or a state govern.
CHAPTR FOUR:“DATA ANALYSIS AND INTERPRETATION”. 1. Statement of the problem: “Analyses the performance of mutual fund with reference to mutual fund industry.” 2. Objectives: To evaluate investment performance of mutual funds in terms of risk and return. To examine the funds sensitivity to the market fluctuations in terms of beta. To find out the financial performance of mutual fund schemes. To appraise investment performance of mutual funds with risk adjustment, the theoretical parameters as suggested by Sharpe, Treynor and Jensen.
To analyze the performance of various schemes of mutual funds.
3. Methodology: Methodology is a way to systematically solve the research problem. It may be understood as a science of studying how research is done scientifically. • Type of the study: o Descriptive study: The type of the study or research used in this project is a descriptive research design. It mainly involves surveys and facts findings enquiries of different kinds. The main objective of descriptive research is to describe the state of affairs as it exists at present.
Type of data: o Secondary data:
“The data (published or unpublished) which have already been collected and processed by some agency or person and taken over from there and used by any other agency for their statistical work are termed as person and taken over from there and used by any other agency for their statistical work are termed as secondary data”.
ANALYSIS AND DISCUSSION:
4.1 ING Domestic Opportunities Fund:
Nature of the scheme: An open ended equity scheme Scheme objective : To provide long term capital appreciation from a portfolio that is Primarily invested in companies, which derive significant Proportion of their revenues from domestic Indian market economy. Investment pattern: Minimum Rs.5000 and in multiples of Rs.1 Date of launch Fund size : 12-09-2002 : 112.29 Crores
NAV per unit as on 31th January 2008 Growth Option Dividend Option Bonus Option Benchmark Load structure Entry load : 2.25% for investment of less than Rs,1 cr. No entry load on Investment of more than 1 cr.
: Rs. 36.28 : Rs. 16.69 : Rs. 36.28 : BSE-100
: 1% on the investment below 1 cr. And redeemed within 180 days, 0.5% if Redeemed after 180 but before 365 days and no exit load on the investment of more than 1 cr.
4.1.1Port folio construction as on 31th January 2008: Assets under Management: Rs. 112.29 crores. Table 1.1 Sectors and companies Banks Refineries/marketing Telecom – services Power equipments Diversified- construction steel Passenger / utility vehicles cigarettes Transmission towers Oil exploration/production Construction projects Consumer electronics Housing finance Plastic products NBFC Cement Computer-hardware Pharmaceuticals Gas transmission/marketing
% of portfolio 15.27 9.76 6.68 5.08 4.74 4.40 3.70 3.49 3.09 2.64 2.50 2.34 2.15 2.11 2.01 1.98 i.92 1.82 1.80
Fabrics and garments Fertilizers-nitrogenous Power Industrial equipment and others
1.79 1.64 1.59 17.5
4.1.2 Fund performance as on 31th January 2008: Table 1.2 Period Last one year Last two year Last three year Last four year Last five year Actual return 16.10 31.02 41.19 43.28 46.31 Benchmark rturn 17.95 32.12 38.92 42.58 42.04
4.1.3 Quantitative data: Table 1.3 Sharpe ratio Treynor ratio Jensen ration 0.918 23.69 -4.99
Interpretation: By comparing these three ratios the fund giving fair return that is 0.918 by taking into consideration of total risk of 23.19 because it measures the reward to the total risk. By
evaluating treynor ratio this fund performing well it gives 23.69 returns by talking into consideration of total market risk this fund gave the good return but it can’t perform up to the benchmark return for last two years so it gave negative result in the Jensen ratio.
4.2 ING Select Stock Fund:
Nature of the scheme: An open ended growth scheme Scheme objective : To provide long term capital appreciation from a portfolio that is Primarily invested in equity and equity related securities. Investment pattern: Minimum Rs.5000 and in multiples of Rs.1 Date of launch Fund size : 06-05-1999 : 36.55 Crores
NAV per unit as on 31th January 2008 Growth Option Dividend Option Benchmark Load structure Entry load : 2.25% for investment of less than Rs,1 cr. No entry load on Investment of more than 1 cr. Exit load/CDSC : 1% on the investment below 1 cr. And redeemed within 180 days, 0.5% if Redeemed after 180 but before 365 days and no exit load on the investment of more than 1 cr.
: Rs. 36.80 : Rs. 19.44 : BSE-100
4.2.1 Portfolio construction as on 31th January 2008: Asset under management Rs.36.55crores: Table 1.4 Sectors and companies Banks Refiniries/marketing Computers-software Telecom-services Steel Financial institutions Diversified-constructions Power equipments Housing finance Construction projects Cement Oil exploration/production Industrial minarals Cigarates Residential/commercial/sez projects Construction civil Plastic products Fabrics and garments NBFC Passenger/utility vehicles Pharmaceuticals Printing and publishing Ship building Stock broking and allied Oil exploration CBLO/Repo/FD/Cash/Other assets % portfolio 11.36 8.49 8.27 6.88 6.04 5.24 4.06 3.69 3.50 3.47 2.88 2.81 2.80 2.67 2.44 2.27 1.99 1.90 1.90 1.86 1.86 1.84 1.84 1.81 1.33 4.56
4.2.2 Fund performance as on 31th January 2008: Table 1.5 Period Last one year Last two year Last three year Last four year Last five year Actual return 17.72 31.85 41.17 38.83 16.07 Benchmark return 17.95 32.12 38.92 42.58 22.49
4.2.3 Quantitative data: Table 1.6 Sharp ratio Treynor ratio Jensen ratio 0.9466 23.88 -1.94
Interpretation: By comparing these ratios the sharp ratio shows that the fund performing better and giving fair return that is 0.9466. by evaluating treynor ratio this fund able to give good returns that is 23.88 by considering market risk of 1.01. This fund consistently performing well. Because it gave less negative value -1.94, it shows that fund generating good returns.
4.3 ING Dividend Yield Fund:
Nature of the scheme: An open ended equity scheme. Scheme objective : To provide long term capital appreciation and / or dividend distribution by investing predominantly in equity and equity related instruments, which offer high dividend yield. Investment pattern: Minimum Rs.5000 and in multiples of Rs.1 Date of launch Fund size : 24-10-2001 : 28.89 Crores
NAV per unit as on 31th January 2008 Growth Option Dividend Option Bonus option Benchmark Load structure Entry load : 2.25% for investment of less than Rs,1 cr. No entry load on investment of more than 1 cr. Exit load/CDSC : 1% on the investment below 1 cr. And redeemed within 180 days, 0.5% if Redeemed after 180 but before 365 days and no exit load on the investment of more than 1 cr : Rs. 15.12 : Rs. 13.74 : Rs. 15.12 : BSE-100
4.3.1 Portfolio construction as on 31th January 2008: Asset under management Rs.28.89 crores: Table 1.7 Sectors and companies Banks Refineries/marketing Fertilizers-nitrogenous Electrodes Computer software Fertilizers-phosphatic LPG/CNG/PNG/LNG SUPPLIERS Motor cycles/scooters Shipping Diversified consumer goods Oil exploration/ production Industrial minerals Axles Ship building Spinning cotton/blended Steel Steel products Cement Stock broking and allied Petrochemicals NBFC CBLO/Repo/FD/Cash/Other assets % Portfolio 15.26 8.71 7.14 5.79 5.40 4.70 4.53 4.49 4.48 4.30 4.27 3.68 3.08 2.85 2.04 1.90 1.87 1.62 1.11 0.70 0.09 5.11
4.3.2 Performance of fund as on 31 th 2008: Table 1.8 Period Last one year Last two year Last three year Last four year Last five year Actual return 15.77 28.14 35.08 40.02 19.97 Benchmark return 17.95 32.12 38.92 42.58 43.03
4.3.3 Quantitative data: Table 1.9 Sharp ratio Treynor ratio Jensen ration 0.874 33.48 -6.19
Interpretation: By comparing these ratios the sharp ratios shows that the fund performing well and gives return like 0.874 by taking total risk 26.07 by evaluating treynor ratio this fund able to give good return 33.48 by considering market risk of 0.83. This fund gave Jensen of -6.19 more – ve value because first and last year it perform poor.
4.4 ING L.I.O.N: (Large cap, Intermediate cap, Opportunities, New Offering) Fund:
Nature of the scheme: An open ended diversified equity scheme. Scheme objective : To provide medium to long term capital appreciation by investing In stocks across the entire capital market capitalization range. Investment pattern: Minimum Rs.5000 and in multiples of Rs.1 Date of launch Fund size : 28-12-2001 : Rs.53.96 Crores
NAV per unit as on 31th January 2008 Growth Option Dividend Option Bonus option Benchmark Load structure Entry load : 2.25% for investment of less than Rs,1 cr. No entry load on investment of more than 1 cr. Exit load/CDSC : 1% on the investment below 1 cr. And redeemed within 180 days, 0.5% if Redeemed after 180 but before 365 days and no exit load on the investment of more than 1 cr. : Rs. 16.07 : Rs. 16.07 : Rs. 16.07 : BSE-100
4.4.1 Portfolio construction as on 31th January 2008: Asset under management Rs. 53.96 crores: Table 1.10 Sectors and companies Banks Refineries/marketing Computer –software Telecom-services Steel Financial institutions Diversified-construction Power equipment Housing finance Pharmaceuticals Construction projects Cement Residential/commercial/sez projects cigarettes Oil exploration/production Fabrics and garments Gas transmission/marketing Industrial minerals Passenger/utility vehicles Ship building Plastic products NBFC Stock broking/allied Oil exploration Fertilizers-phosphatic Transmission towers CBLO/Repo/FD/Cash/Other assets % portfolio 13.20 8.44 7.84 6.16 5.91 5.11 4.07 4.03 3.06 3.72 3.36 2.85 2.78 2.78 2.76 2.52 2.36 2.25 2.00 1.96 1.79 1.48 1.35 1.35 1.14 0.75 4.08
4.4.2 Performance of fund as on 31 th 2008: Table 1.11 Period Last one year Last two year Actual return 15.20 26.74 Benchmark return 17.95 32.12
Last three year Last four years Last five years
35.82 40.12 25.44
38.92 42.58 37.09
4.4.3 Quantitative Data: Table 1.12 Sharp ratio Treynor ratio Jensen ratio 0.982 24.64 -3.92
Interpretation: This fund gave the return of 0.982 with total risk of 24.08, shows that this fund is performing well. By compairing treynor ratio it shows that the fund gave the more return of -3.92 which shows that the fund can’t out perform even for one time.
4.5 ING Nifty plus Fund:
Nature of the scheme: An open ended index linked equity scheme. Scheme objective : The objectives of the fund is to invest in companies whose Securities are included in the S & P CNX Nifty Index. Investment pattern: Minimum Rs.5000 and in multiples of Rs.1
Date of launch Fund size
: 23-02-2002 : Rs.10.90 Crores
NAV per unit as on 31th January 2008 Growth Option Dividend Option Bonus option Benchmark Load structure Entry load : 2.25% for investment of less than Rs,1 cr. No entry load on investment of more than 1 cr. Exit load/CDSC : 1% on the investment below 1 cr. And redeemed within 180 days, 0.5% if Redeemed after 180 but before 365 days and no exit load on the investment of more than 1 cr. : Rs. 25.78 : Rs. 17.16 : Rs. 25.78 : S & p CNX Nifty Index.
4.5.1 Portfolio construction as on 31th January 2008: Asset under management Rs. 10.90 crores: Table 1.13 Sectors and companies Banks
% Portfolio 11.36
Telecom-services Refineries/marketing Computers-software Oli exploration/production Power Power equipments Steel Diversified-construction Cigarettes Housing finance Pharmaceuticals Cement Residential/commercial/sez project Aluminium Diversified-consumer goods Copper & copper products Passenger/utility vehicles Motor cycles/scooters Gas transmission/marketing Commercial vehicles T V broadcosting and software production CBLO/Repo/FD/Cash/Other assets
11.20 10.70 9.07 8.47 7.60 6.39 4.57 3.43 2.86 2.60 2.09 1.89 1.69 1.53 1.46 1.38 1.30 1.18 1.10 0.53 0.39 7.21
4.5.2 Performance of fund as on 31 th 2008: Table 1.14 Period Last one year Last two year Actual return 11.26 22.70 Benchmark return 13.44 25.83
Last three year Last four year Last five year
33.44 35.85 27.17
35.66 37.57 30.35
4.5.3 Quantitative Data: Table 1.15 Sharp ratio Treynor ratio Jensen ratio 0.939 23.16 -0.356
Interpretation: This fund gave the more sharp ratio that is 0.939 showed that, fund performing well during five years history with total risk of 26.07. by evaluating treynor ratio, the fund gave return of 23.16 with little more market risk of 0.91 and fund performing well during five years of history because it gaves very less difference between actual and benchmark return -0.356.
4.6 ING Tax Savings Fund:
Nature of the scheme: An open ended equity linked savings scheme. Scheme objective : The objectives of the fund is to generate medium to long term Growth of capital along with income tax rebate. Investment pattern: Minimum Rs.5000 and in multiples of Rs.1
Date of launch Fund size
: 28-03-2002 : Rs.58.76 Crores
NAV per unit as on 31th January 2008 Growth Option Dividend Option Bonus option Benchmark Load structure Entry load : 2.25% for investment of less than Rs,1 cr. No entry load on investment of more than 1 cr. Exit load/CDSC : 1% on the investment below 1 cr. And redeemed within 180 days, 0.5% if Redeemed after 180 but before 365 days and no exit load on the investment of more than 1 cr. : Rs. 29.37 : Rs. 14.49 : Rs. 29.4 : CNX Midcap
4.6.1 Portfolio construction as on 31th January 2008: Asset under management Rs. 58.76 crores: Table 1.16 Sectors and companies Construction projects Pharmaceuticals
% Portfolio 8.70 7.40
Banks LPG/CNG/LNG SUPPLIER Refineries/marketing Power equipments Trading Personal care Paints Fertilizers-phosphate Residential/commercial/sez projects Financial institution Ship building Industrial minerals Plastic products Fabrics and garments Hotels Stockbroking and allieds Steel Fertilizers and nitrogeneous Steel products Retailing Industrial equipment Printing and publishing Sugar Electrodes Computer software Oil exploration Air conditioner NBFC Aluminium CBLO/Repo/FD/Cash/Other assets 4.6.2 Performance of fund as on 31 th 2008: Table 1.17 Period Last one year Last two year Last three year Last four year Last five year Actual return 0.62 5.31 33.37 46.28 32.32
6.28 5.69 4.77 4.64 4.54 3.45 3.45 3.41 3.36 3.03 3.02 2.95 2.89 2.63 2.55 2.38 2.17 2.06 1.94 1.93 1.90 1.89 1.52 1.50 1.50 1.49 1.33 0.09 0.03 3.60
Benchmark return 18.30 38.42 36.63 49.39 38.36
4.6.3 Quantitative data: Table 1.18 Sharp ratio Treynor ratio Jensen ratio 0.741 20.64 -9.518
Interpretation:Sharp ratio shows the reward to total risk associated with fund. That is this fund gave the return of 0.714 with risk of 26.01. the treynor ratio shows that the fund performance by considering market risk it gave less return 20.64 because they have to create awqrness of the fund to the people. Because of new category og fund the Jensen ratio also very less that is -9.518 shows that fund performance not able to beat the benchmark return.
4.7 HDFC Growth Fund:
Nature of the scheme: An open ended growth scheme. Scheme objective : The objectives of the fund is to generate long term capital Appreciation from a portfolio that is invested predominantly in Equity and equity related instruments.
Investment pattern: for new investor Rs.5000 and in multiples of Rs.100 thereafter. For existing investor Rs.1000 and in multiples of Rs.100 thereafter. Date of launch Fund size : 11-09-2000 : Rs.894.707 Crores
NAV per unit as on 31th January 2008
Growth Option Dividend Option Benchmark Load structure Entry load
: Rs. 68.432 : Rs. 33.714 : Sensex
: 2.25% for investment of less than Rs,5 cr. No entry load on investment of more than 5 cr.
: 1% on the investment below 5 cr. And redeemed within 365 days, and no exit load on the investment of more than 5 cr.
4.7.1 Portfolio construction as on 31th January 2008: Asset under management Rs. 894.707 crores: Table 1.19 Sectors or industry Petroleum products Banks (state bank of india) Consumer non durable goods Pharmaceuticals Finance Banks (icici bank) Telecom services Industrial capital goods Industrial capital goods % Portfolio 6.14 5.88 5.53 5.02 4.68 4.35 4.32 4.30 3.80
Industrial capital goods Total of ten equity holdings Total equity and equity related holdings ICICI Bank ltd. Jindal Saw ltd. Tatal debt/money market instrument Other current assets (Repo and CBLO) Grand total Net assets
3.58 47.60 93.15 3.33 1.66 4.99 1.86 100 894.707cr
4.7.2 Performance of fund as on 31 th 2008: Table 1.20 Period Last one year Last two year Last three year Last four year Last five year Actual return 16.55 39.89 42.32 51.42 29.72 Benchmark return 13.49 25.25 39.11 40.24 19.61
4.7.3 Quantitative data: Table 1.21 Sharp ratio Treynor ratio 4.00 30.89
Interpretation: This fund gave the more sharp ratio, 4.006 shows that the fund performing better during five year history with the tatal risk of 7.75. by evaluating Treynor ratio the fund gave the return of 30.89 by considering the beta value of 1.003 it shows that even though in volatile condition the fund perform well, the Jensen gave the positive return of 8.30 it shows that actual return is more than benchmark return during 5 year history because it is difference between actual and benchmark return.
4.8 HDFC Equity Fund:
Nature of the scheme: An open ended growth scheme. Scheme objective : The objectives of the fund is to generate long term capital appreciation Investment pattern : For new investor Rs.5000 and in multiples of Rs.100 thereafter. for existing investor Rs.1000 and in multiples of Rs.100 thereafter. Date of launch Fund size : 01-01-1995 : Rs.4, 716 Crores
NAV per unit as on 31th January 2008 Growth Option Dividend Option Benchmark Load structure: : Rs. 188.420 : Rs. 49.444 : S & P CNX 500
: 2.25% for investment of less than Rs,5 cr. No entry load on investment of more than 5 cr.
4.8.1 Portfolio construction as on 31th January 2008: Asset under management Rs. 4,716 crores: Table 1.22 Sectors and industry banks Media and entettainment Industrial capital goods Industrial capital goods Banks Pharmaceuticals Consumer non durables Pesticides Pharmaceuticals % Portfolio 9.73 4.63 4.42 4.14 3.92 3.50 3.30 3.29 3.20
Industrial capital goods Total equity holdings Total equity and equity related holdings Jindal saw ltd. Total debt/money market instrument Other Current Aseets Grand total Net assets
3.09 43.27 98.01 1.68 1.68 0.31 100 4716 cr
4.8.2 Performance of fund as on 31 th 2008: Table 1.23 Period last one year last two year Last three year Last four year Last five year Actual return 9.34 24.46 43.43 53.02 40.42 Benchmark return 14.94 28.17 34.98 42.13 21.99
4.8.3 Quantitative data: Table 1.24 Sharp ratio 3.74
Treynor ratio Jensen ratio
Interpretation: This fund gave the sharp ratio of 3.74 that is reward of 3.47 with risk of 7-77% and giving good return to the investor. Treynor ratio gave the value of 32.98 means it gave the good return with overcoming market risk of 0.883 and succeed in the performance. The Jensen ratio measure that fund beat the benchmark return and gave the return of 8.44.
4.9 HDFC Top 200 Fund:
Nature of the scheme: An open ended growth scheme. Scheme objective : The objectives of the fund is to generate long term capital Appreciation from a portfolio of equity and equty-linked Instruments primarily drawn from the companies in BSE 200 index Investment pattern: For new investor Rs.5000 and in multiples of Rs.100 thereafter. for existing investor Rs.1000 and in multiples of Rs.100 thereafter. Date of launch Fund size : 11-10-1996 : Rs.2,363.26 Crores
NAV per unit as on 31th January 2008 Growth Option
: Rs. 147.718
Dividend Option Benchmark Load structure Entry load
: Rs. 48.858 : BSE Sensex
: 2.25% for investment of less than Rs,5 cr. No entry load on investment of more than 5 cr.
: 1% on the investment below 5 cr. And redeemed within 365 days, and no exit load on the investment of more than 5 cr.
4.9.1 Portfolio construction as on 31th January 2008: Asset under management Rs. 2,363.26 crores: Table 1.25 Sectors and industry Banks (ICICI Bank) Petroleum products Software Consumer non durables Industrial capital goods Banks(SBI) Pharmaceuticals Telecom services Total of top ten equity holdings
% Portfolio 8.75 6.29 4.66 3.65 3.52 3.15 2.70 2.65 41.10
total equity and equity related holdings Debt/money market instrument Rabo india finance privaye ltd. ICICI bank Ltd. total debt/money market instrument Other Current Assets(including reverse repos’/CBLO Grand total Net Assets Net assets (in laks)
0.63 0.42 1.05 2.47 100.00 2,363.26 236,326.17
4.9.2 Performance of fund as on 31 th 2008: Table 1.26 Period Last one year Last two year Last three year Last four year Last five year Actual return 15.75 31.47 43.09 53.79 32.24 Benchmark return 17.75 31.86 36.93 42.23 21.65
4.9.3 Quantitative data: Table 1.27 Sharp ratio Treynor ratio 4.17 34.43
Interpretation: This fund perform well and gave the sharp value of 4.11 by considering total risk 7.25 and treynor ratio shows that the fund succeed in overcoming market risk and gave return of 43.43% and Jensen gave positive return 8.22 means that fund beat the benchmark return in it’s five year history.
4.10 HDFC Capital Builder Fund:
Nature of the scheme: An open ended growth scheme. Scheme objective : The objectives of the fund is to generate long term capital appreciation in long term Investment pattern: for new investor Rs.5000 and in multiples of Rs.100 thereafter. for existing investor Rs.1000 and in multiples of Rs.100 thereafter. Date of launch Fund size : 01-02-1994 : Rs.750.63 Crores
NAV per unit as on 31th January 2008 Growth Option Dividend Option : Rs. 88.367 : Rs. 31.510
Benchmark Load structure Entry load
: S & P CNX 500
: 2.25% for investment of less than Rs,5 cr. No entry load on investment of more than 5 cr.
4.10.1 Portfolio construction as on 31th January 2008: Asset under management Rs.2,363.26 crores: Table 1.28 Sectors and industry Banks Industrial products Banks Industrial capital goods Auto ancillaries Industrial capital goods Pharmaceuticals % portfolio 6.11 6.06 5.54 4.47 4.46 4.12 4.02
Ferrous metals Industrial products Chemicals Total top ten equity holdings Total equity and equity related holdings Debt/money market instruments Jindal saw Ltd. Total debt/money market instruments Other current Assets(Including reverse repo’s/CBLO Grand total Net assets
3.94 3.93 3.43 46.18 95.74
1.98 1.98 2.28 100.00 750.63
4.10.2 Performance of fund as on 31 th 2008: Table 1.29 Period Last one year Last two year Last three year Last four year Last five year Actual return 14.89 37.09 36.50 52.56 30.27 Benchmark return 14.94 28.17 34.98 42.13 21.99
4.10.3 Quantitative data: Table 1.30 Sharp ratio 4.29
Treynor ratio Jensen ratio
Interpretation: This fund able to compensate the risk and possible of giving return of 4.29, treynor gave the return of 33.17% with considering market risk of 0.8708 and able to beat the market risk . Jensen gave the value of 9.20 shows that the fund beat the benchmark return and gave the good return to the investors.
4.11 HDFC Index Fund:(Sensex plan):
Nature of the scheme: An open ended index linked scheme. Scheme objective : The objectives of the fund is to generate returns that are commensurate With the performance of the sensex, subject to tracking record.
Investment pattern: for new investor Rs.5000 and in multiples of Rs.100 thereafter. for existing investor Rs.1000 and in multiples of Rs.100 thereafter. Date of launch Fund size : 17-07-2002 : Rs.78.02 Crores
NAV per unit as on 31th January 2008
Growth Option Benchmark Load structure Entry load
: Rs. 154.2977 : Sensex
Exit load/CDSC : 1% on the investment below 5 cr. And redeemed within 365 days, and no exit load on the investment of more than 5 cr.
4.11.1 Portfolio construction as on 31th January 2008: Asset under management Rs. 78.02 crores: Table 1.31 Sectors and industry Pertrolium products Banks(ICICI) Industrial capital goods Software Finance % Portfolio 14.85 10.39 7.95 6.02 5.58
Telecom services Banks(SBI) Consumer Non durables Bank(HDFC) Telecom services
4.73 4.29 4.24 3.68 (Reliance 3.58 65.29 98.59 1.41 100 78.02 crs.
communication) Total top ten equity holdings Total equity and equity related holdings Other Current Assets(Repo/CBLO) Grand total Net Assets
4.11.2 Performance of fund as on 31 th 2008: Table 1.32 Period Last one year Last two year Last three year Last four year Last five year Actual return 8.47 18.68 35.37 36.34 32.68 Benchmark return 14.37 27.75 42.64 44.43 39.50
4.11.3 Quantitative data: Table 1.33 Sharp ratio Treynor ratio Jensen ratio 2.62 22.45 -10.69
Interpretation: This fund able to compensate the risk and possible to give the return of 2.6. treynor gave the normal return of 22.45 with beta of 0.949 by considering Jensen ratio we come to know that the fund has not performed well during five year of history which gave the –ve value of -10.69.
4.12 HDFC Index Plan (Nifty Plan);
Nature of the scheme: An open ended index linked scheme. Scheme objective : The objectives of the fund is to generate returns that are commensurate with the performance of the nifty subject to tracking record.
Investment pattern: for new investor Rs.5000 and in multiples of Rs.100 thereafter. for existing investor Rs.1000 and in multiples of Rs.100 thereafter. Date of launch Fund size
: 17-07-2002 : Rs.49.42 crores
NAV per unit as on 31th January 2008 Growth Option Benchmark Load structure Entry load : Nil : Rs. 46.6758 : S & P CNX Nifty
Exit load/CDSC : 1% on the investment below 5 cr. And redeemed within 365 days, and no exit load on the investment of more than 5 cr.
4.12.1 Portfolio construction as on 31th January 2008: Asset under management Rs. 49.42 crores: Table 1.34 Sectors and industry Pertoleum products Oil Telecom services(Bharati airtel) Power % Portfolio 11.83 6.94 5.35 5.31
Banks(ICICI Bank) Telecom services(reliance communication) Banks(SBI) Industrial capital goods(Larsen and Turbo) Industrial capital goods(BHEL) Ferrous metals Total of top ten equity holdings Total of equity and equity related holdings Other Current Assets(Includind Repo/CBLO) Grand total Net Assets
4.14 4.05 3.87 3.50 3.31 2.91 51.21 96.66 3.34 100 49.42 crs.
4.12.2 Performance of fund as on 31 th 2008: Table 1.35 Period Last one year Last two year Last three year Last four year Last five year Actual return 7.06 17.91 31.86 34.85 31.26 Benchmark return 13.90 27.47 37.67 40.13 35.85
4.12.3 Quantitative data:
Table 1.36 Sharp ratio Treynor ratio Jensen ratio 2.45 23.06 -2.49
Interpretation: This fund gave the return of 2.45% with risk of 7.98, the fund not able to provide better return to the investor, by compairing the treynor ratio this fund gave the normal return of 23.06 with beta of 0.894. Jensen ratio provide that the fund performing well and not so good and it gave the negative value of -2.49.
CHAPTER FIVE: 5.1 SUMMARY OF FINDINGS: Following are the findings of the ING and HDFC funds: • Sharp ratio indicates that fund performance by considering overall total risk. Some funds are not able to perform well because of total risk involved in the funds.
ING investing funds in the some selected sectors. So it is not possible to diversify the risk associated with funds, so they having more standard deviation.
Because of volatility in the market conditions. The funds are not able to cross the benchmark return so fund houses should concentrate on the market conditions.
By considering Jensen ratio it shows that no fund has not crossed more time benchmark return so that’s why Jensen ratio can’t give the +ve return for many funds.
By considering treynor ratio it shows that the fund performs well during 5 years of history and able to overcome the market risk.
From portfolio construction shows that, the fund diversifies it’s risk for some extent so the fund able to give +ve return based on Jensen ratio.
In HDFC all funds are having very less standard deviation and it helps the fund to generate good returns on the fund.
Out of six funds last two funds that is sensex and index got –ve value based on Jensen ratio because they gave more preference for bank deposits.
Out of six equity schemes many funds are crossed the benchmark return because of the well management of funds and well diversifying of risk.
“Mutual fund is booming sector now a days and it has lot of scope to generate income and providing return to the investor, the mutual fund is one of the way to development of country and helps to mobilizing dead money in the economy which helps to develop the economic conditions of the country and people. Mutual fund helps the people for studying the market conditions, it providing lot of opportunities to the people for research work and helps the people to know the new things going on around the world. It gave the more knowledge to the person, because it diversifies the risk by investing in different securities.”
5.3 SUGGESSTIONS: Following are the suggestions for the both funds.
The fund house has to reduce the total risk involved in the fund in order to increase the return with good portfolio construction.
The fund house should select the innovative way of portfolio construction and should see the attracting areas of investing funds.
The fund houses should concentrate on the market conditions according to that they have to set the benchmark and invest in different sectors.
The fund houses should invest in good and attracting sectors to reduce standard deviation.
The fund house should try to reduce little more beta in order to generate more returns to investors.
In ING Jensen never gave the +ve value so fund house try to cross the benchmark return and achieve the objectives of the fund.
HDFC fund house gave the good return it showed by sharp ratio even though they have to reduce the total risk by diversifying their portfolio and achieving objectives.
The HDFC investing in diversifies areas but not in upcoming areas like real estate and infrastructure better to invest in those areas to increase return.
HDFC still it has to reduce the standard deviation to generate more return by reducing total risk factors associating with mutual funds, and analyses all the factors.
HDFC has to concentrate on those funds which are performing less than thir benchmark return and take actions and analyse the market conditions and take correct steps
5.4 BIBLIOGRAPHY: BOOK REFERENCES: V.A.AVADHANI (2006): Security analysis and portfolio management, Himalaya publishing house. 6th Edition. L.M.BHOLE (2005) : Financial institutions and market, Tata Mcgraw – hill. FISHER AND JORDEN (2000): Security analysis and portfolio management, Prentice hall. WEBSITES: www.valueresearchonline.com www.amfindia.com www.google.com www.ingim.co.in www.hdfcfund.com www.investorsideas.com Company’s fact sheet and journals. PUBLISHED MAGAZINES AND ARTICLES: Thomos davenport (2007): “Mutual fund investment”, investors India.
Sanjay j bhayani ss(2008): “An empirical analysis of performance evaluation of mutual fund schemes in india”, capital market(Icfai journals): P.Prasad Rao(2007): “distribution channels in the mutual fund industry”, Money market(Icfai journals). Siddhartha Srivastava(2008): “real estate fund , present conditions and future of the fund” Capital market(Investment management).
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