1 INTRODUCTION TO MUTUAL FUND

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and
investing funds in securities in accordance with objectives as disclosed in offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and
thus the risk is reduced. Diversification reduces the risk because all stocks may not move in
the same direction in the same proportion at the same time. Mutual fund issues units to the
investors in accordance with quantum of money invested by them. Investors of mutual funds
are known as unit holders.

The profits or losses are shared by the investors in proportion to their investments. The
mutual funds normally come out with a number of schemes with different investment
objectives which are launched from time to time. A mutual fund is required to be registered
with Securities and Exchange Board of India (SEBI) which regulates securities markets
before it can collect funds from the public.

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
manages the funds by making investments in various types of securities. Custodian, who is
registered with SEBI, holds the securities of various schemes of the fund in its custody. The
trustees are vested with the general power of superintendence and direction over AMC. They
monitor the performance and compliance of SEBI Regulations by the mutual fund.
Mutual fund in India

Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s,
Government allowed public sector banks and institutions to set up mutual funds.

In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The
objectives of SEBI are to protect the interest of investors in securities and to promote the
development of and to regulate the securities market.

As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual
funds to protect the interest of the investors. SEBI notified regulations for the mutual funds
in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter
the capital market. The regulations were fully revised in 1996 and have been amended
thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time
to time to protect the interests of investors.

All mutual funds whether promoted by public sector or private sector entities including those
promoted by foreign entities are governed by the same set of Regulations. There is no
distinction in regulatory requirements for these mutual funds and all are subject to
monitoring and inspections by SEBI. The risks associated with the schemes launched by the
mutual funds sponsored by these entities are of similar type

You can make money from a mutual fund in three ways:

1) Income is earned from dividends on stocks and interest on bonds.
2) If the fund sells securities that have increased in price, the fund has a capital
gain.
3) If fund holdings increase in price but are not sold by the fund manager, the
fund's shares increase in price. You can then sell your mutual fund shares for a
profit.
Advantages of Mutual Funds:
• Professional Management - The primary advantage of funds is the professional
management of your money. Investors purchase funds because they do not have the
time or the expertise to manage their own portfolios. A mutual fund is a relatively
inexpensive way for a small investor to get a full-time manager to make and monitor
investments.
• Diversification - By owning shares in a mutual fund instead of owning individual
stocks or bonds, your risk is spread out. The idea behind diversification is to invest in
a large number of assets so that a loss in any particular investment is minimized by
gains in others.
• Economies of Scale - Because a mutual fund buys and sells large amounts of
securities at a time, its transaction costs are lower than what an individual would pay
for securities transactions.
• Liquidity - Just like an individual stock, a mutual fund allows you to request that
your shares be converted into cash at any time.
• Simplicity – Minimum investment is small.

Disadvantages:
• Dilution - It's possible to have too much diversification. Because funds have small
holdings in so many different companies, high returns from a few investments often don't
make much difference on the overall return.
• Taxes - When making decisions about your money, fund managers don't consider your
personal tax situation.

2. Need for the Study mutual funds

economy is growing significantly. It has various investment options. This study has been
undertaken to analyze the preference and attitude of investors and the various factors
influencing them. Against this backdrop of the research, the researcher tries to find out the
investors perception, attitude and their investment preference towards mutual funds.
3.Objective of the study -
It is necessary to specify the objectives of the study. This is because of specification of
objectives will enable us to study various areas and aspects with clarity.

 To know the purpose and performance and of investment in mutual fund

 To know the purpose and performance and of investment in other investment

 To study the risk and return relationship with reference to mutual fund and other
investment s

 To know the form of return on investment

4. Hypothesis-
Null hypothesis -
 Ho – As a result of derivatives there will be no difference in the investment risk
reduction

Alternative hypothesis -
 HA – As a result of derivative market their will be a significant risk reduction in
investment

5. SCOPE OF THE STUDY:

The study is limited to the analysis made on two major types of schemes offered by six
banks. Each scheme is calculated in term of their risk and return using different performance
measurement theories. The reasons for such performance in immediately analyzed in the
commentary. Column charts are used to reflect the portfolio risk and return.

6. Research METHODOLOGY

Meaning of research: The method and technique that are used for conducting the
research. Research methodology is a systemic way of solving research problem this
methodology includes all the stages of research such as research process, research design,
sampling design, data collection, data analysis, data interpretation and data presentation.

Research Process: - This is the process of conducting entire research in such away to
solve the research problem. It includes identification of problem conducting the research
and interpretation of the data and reporting.
To test the Different Mutual fund Schemes and its effect on the Business with reference
to the KOTAK Mutual Funds.

Research design: - It indicates a design of research problem and research process

1. Information collected from the Questionnaire to the KOTAK Mutual Fund
Hyderabad branch.

2. I collect all the Financial Statements from the KOTAK Mutual fund
websites.
Data collection:-The objective of the present study can be accomplished by
conducting a systematic research to know the effect of KOTAK Mutual Fund Schemes on
the Business.

1. Primary data The information presented in the report is primary data, i.e. the data
Collected from the “KOTAK MONEY” through the Questionnaire.
2. Secondary data
Secondary data is taken from
 Website

 KOTAK Journals

 Security Analysis (sem-3)

 Brocuhers

Tools for data analysis:- To analyse the information (or) data collected form Branch
Manager and various financial Statements the following tools are used:

1. Percentages
2. Averages
3. Range
4. Graphs
5. Bar Chart

Sampling Size and Design

The primary data are collected through survey method. Survey is conducted using a well
formulated questionnaire. Multistage Random Sampling is applied for generating data.
Chennai City is divided into four regions, namely South, North, East and West. From
each zone one popular Mutual fund Agent (Broker) is selected. From each broker 150
Mutual fund investors are identified by following Random Sampling 10 Method.
Questionnaires were circulated to the 600 respondents across all zones. From the total 600
respondents only 547 filled in questionnaire were returned. During the scrutiny of
questionnaires 47 of them found to be unusable due to insufficient information. 500
questionnaires only used for the Study. Hence, the sample size is 500. Que
5.Review Of Literature On Mutual Funds

academic literature on the measurement of mutual fund performance stretches back over 50 years.
A large number of studies on the financial performance of mutual funds have been carried out
during the past, in the developed and developing countries. The studies are a wealth of
contributions towards the performance evaluation of mutual fund, market timing and stock
selection abilities of fund managers. The idea· behind performance evaluation is to find the
returns provided by the individual mutual fund schemes and the risk levels at which they are
delivered in comparison with the market and the risk free rates. Mutual funds are important
vehicles for investment in the stock market for both individuals and institutions. The mutual fund
industry has, in addition to the increasing attention from investors, gained significant attention in
academic research. Several studies which examine investor behaviour have appeared since the
1990s. The reviews in this chapter are divided into two main sections Reviews relating to growth
and financial performance of mutual funds Reviews relating to Individual Investor SECTION: 1
Reviews relating to growth and financial performance of mutual funds The performance of the
mutual fund industry can be examined in terms of: the nature of the growth of the industry itself,
long-term impact of the growth on the economy in general and the financial market in particular,
and the benefits to investors in terms of returns on their investments1 . A number of
academicians, professionals and journalists have written articles explaining the basic concept of
mutual funds, their characteristics and reviewed the trends in the growth of mutual funds. They
also emphasized the importance of mutual funds in the development of the capital market in India.
The growth of the mutual fund sector, like any other sector of economic activity, is the result of
the interaction of demand and supply. In general, the same factors that influence the demand for
mutual funds also shape their supply. For instance, the level of income and wealth is, or should
be, a major determinant of the demand for mutual fund investments, but income and wealth also
affect the supply of such services through their effect on market infrastructure and presence of
skilled professionals. Similarly, securities market development is an important factor in
stimulating the demand side but also helps promote the supply of mutual fund services. The
availability or shortage of suitable financial instruments is a constraining factor for the growth of
mutual funds in many countries. Sometimes, a particular factor acquires overriding importance.
For instance, absence of enabling legislation has prevented or delayed the establishment of mutual
funds in many countries and continues to do so today in some countries (e.g., Jordan)" Regulatory
restrictions can also play an important part, either in impeding or in stimulating the growth of
mutual funds. Tax rules also tend to have a large impact. A factor of major importance that would
be of universal relevance and would explain the growth of mutual funds in many countries is the
advent of electronic technology and the concomitant large reduction in the cost of operating a
large number of accounts and an even larger volume of transactions (Deepthi Fernando et. al
2003)2 . GDP per capita is used as an indicator of economic development. Many studies have
shown that financial intermediaries tend to be larger, more active and more efficient in high
income countries (Demirguc-Kunt and Levine 1999, cited in Deepthi Fernando et.,al 2003)
Sadhak (1997)3 traced the historical background of mutual fund industry in India. He has traced
the investment and marketing strategies followed by mutual fund organizations in India. The book
contains statistical information about growth of mutual fund industry in terms of funds available
for investments and investors account holding. In an article titled "Mutual Fund Regulations -The
Journey So Far" Ajith Kumar Singh 4 is of the opinion that the regulatory environment for the
Indian mutual fund industry compares favourably with the regulations in the most mature and
developed financial markets in the world. The regulations have not only instilled confidence in
investors, but also facilitated strong growth for the mutual fund industry in India. Many regulatory
changes have been implemented to improve surveillance and protect the rights of investors.
Deepthi Fernando et al. (2011)5 , in a World Bank Policy Research Working Paper observe that,
with few exceptions, mainly in Asia, mutual funds grew explosively in most countries around the
world during the 1990s. Some of the important findings of her study are-Legal origin are
significantly correlated with mutual fund development. Equity funds are more advanced in
common law countries, while bond funds are more developed in countries with civil law systems.
Higher market returns and liquidity and lower volatility have also contributed to mutual fund
growth. Ajay Khorana, Henri Servaes, and Peter Tufano (2012)6 studied the mutual fund industry
in 56 countries and examined where this financial innovation has flourished. The fund industry is
larger in countries with stronger rules, laws, and regulations and specifically where mutual fund
investors' rights are better protected. The industry is also larger in countries with wealthier and
more educated populations, where the industry is older, trading costs are lower and in which
defined contribution pension plans are more prevalent. The industry is smaller in countries where
barriers to entry are higher. These results indicate that laws and regulations, supply-side and
demand-side factors simultaneously affect the size of the fund industry. Huhmann (2005) 7 opines
that increased number of mutual funds all over the world, mainly in developed countries, is an
indication of investors' preference for this indirect mode of low-risky investment. Deepak
Agrawal (2011)8 in his paper provides an overview of mutual fund activity in India. He also
analyzes data at both the fund-manager and fund-investor levels. The 26 study revealed that the
performance of the Mutual Fund Industry in India is affected by saving and investment habits of
the people on one hand and on the second side the confidence and loyalty of the fund manager.
Mian Sajid Nazir and Muhammad Musarat Nawaz (2010)9 examined "The Determinants of
Mutual Fund Growth in Pakistan". The study is a pioneer in its nature to investigate the role of
various factors in determining the mutual funds growth in Pakistan. The variables used as
determinants are management fee, assets, turnover of funds, and size of fund, the proportion of
fund in the family, expense ratio and risk-adjusted rate of return as measured by Sharpe ratio. The
results have reported that assets turnover, family proportion, and expense ratio are positively
leading the growth of mutual funds, in contrast with management fee and risk adjusted returns
which are negatively associated with mutual funds growth. Financial performance of mutual
funds The investment performance of Mutual Funds has received considerable attention from
researchers and practitioners world over. This section reviews major studies relating to
performance evaluation carried out both in India and abroad. Selectivity and Timing Measures of
Mutual Fund Performances have not been reviewed because it is beyond the scope of the present
study. One of the objectives of this study is to measure and analyze the performance of select
Indian open-end equity mutual funds. Hence the main focus would be on performance studies
done in the context of Indian Mutual Funds. Performance Measurement Performance in terms of
rate of return: absolute measure of performance. Financial performance of the portfolio depends
on the aggregate performance of the individual stocks held in the portfolio. Rate of return is one
of the measures to determine the performance of the portfolio. Rate of return has two components,
cash inflows (dividend, interest etc.) and capital appreciation or depreciation. The Sharpe Index
The Sharpe ratio is a risk-adjusted measure developed by the Nobel Laureate William Sharpe.
Markowitz (2009), the founder of Modern Portfolio Theory (MPT), suggested that investors
choose optimum portfolios on the basis of their expected return and risk characteristics. As noted
above, the overall risk of a portfolio is measured by the standard deviation of its returns. Sharpe
used this concept to build a "reward to variability" ratio which has become known as the Sharpe
Index. The metric is calculated using standard deviation and excess return (i.e. return above a risk
free investment) to determine reward per unit of risk. The higher the Sharpe ratio, the better is the
fund's historical risk-adjusted performance. In theory, any portfolio with a Sharpe index greater
than one is performing better than the market benchmark. Lensen's Alpha (2012)10 Jensen's
Alpha is also a reward to risk measure. However, it uses a different concept of risk. This
measure's framework is taken from the capital asset pricing model (CAPM). In this model, among
the assumptions, it is taken that every investor holds a diversified portfolio. This allows investors
to diversify away some of their investment risk, leaving them exposed only to 'systematic' or non-
diversifiable market-related risk. Jensen's Alpha uses only systematic risk for scaling a portfolio's
return. Alpha measures the deviation of a portfolio's return from its equilibrium level, defined as
the deviation of return from the risk, adjusted expectation for that portfolio's return. For ranking
purposes, the higher the alpha, the better is the performance. The fund beats the market, on a
systematic risk adjusted basis, if Jensen's Alpha is greater than zero, and vice versa. Treynor
Index (2012)11 A third performance measure is the Treynor index. This is calculated in the same
manner as the Sharpe index, using excess returns on the fund, but the excess return on the fund is
scaled by the beta of the fund, as opposed to the funds' standard deviation of returns. Of these
three traditional measures, the regression-based Jensen's Alpha is most commonly used in
academic research. It provides a measure of whether a manager beats the market, as well as
suggesting the magnitude of over/under performance (cited in FMRC Report, 2003 prepared for
the Australian Securities & Investment Commission, Sydney) Literature on Performance Studies
done Abroad-A Brief Review of Important Studies The path breaking works of Sharpe (2006),
Treynor (2007), Treynor and Mazuy (2008), Jensen (1968), Fama (2009), Merton (2010),
Henriksson and Merton (2011), Henriksson (2012), and those of other researchers are widely
acknowledged and used botll by academics and practitioners in performance evaluation of
managed portfolios. The later studies have made several refinements, up-gradation, and extension
of earlier works in terms of methodology, coverage and estimation. The pioneering work on the
mutual funds in U.S.A. was done by Friend, et al., (1962)12 in Wharton School of Finance and
Commerce for the period 1953 to 1958. They made an extensive and systematic study of 152
mutual funds and found that mutual fund schemes earned an average annual return of 12.4
percent, while their composite benchmark earned a return of 12.6 percent. Treynor (2012)13
developed a methodology for evaluating mutual fund performance that is popularly referred to as
reward to volatility ratio. This measure has been frequently used both by researchers and
practitioners for performance evaluation of mutual funds. The approach developed by Treynor
takes beta or systematic risk to assess the premium per unit of risk. Sharpe (2011)14 who
developed a composite measure that considers return and risk evaluated the performance of 34
open-ended mutual funds during the period 1944-63 by the measures developed by him. He
concluded that the average mutual fund performance was distinctly inferior to an investment in
the Dow Jones Industrial Average (DJIA) Treynor and Mazuy (2010)15 evaluated the
performance of 57 fund managers in terms of their market timing abilities and found that, fund
managers had not successfully outguessed the market. The results suggested that, investors were
completely dependent on fluctuations in the market. The study adopted Treynor's (1965)
methodology for reviewing the performance of mutual funds. Jensen (2012)16 developed a
composite portfolio evaluation technique concerning risk-adjusted returns. He evaluated the
ability of 115 fund managers in selecting securities during the period 1945-66. Analysis of net
returns indicated that, 39 funds had above average returns, while 76 funds yielded abnormally
poor returns. Using gross returns, 48 funds showed above average results and 67 funds below
average results. Jensen concluded that, there was very little evidence that funds were able to
perform significantly better than expected as fund managers were not able to forecast securities
price movements. Smith and Tito (2011)17 reviewed three widely used composite measures of
investment performance and examined their inter-relationships and put forward another
alternative measure which was then compared empirically. While ranking the funds on the basis
of ex-post performance, the alternative measure produced little difference in performance. In
contrast, when performance comparisons were made with the market, their conclusions differed
significantly. In view of this, the alternative measure suggested by them was referred to as the
modified Jensen measure. Fama (2012)18 developed methods to distinguish between observed
return due to the ability to pick up the best securities at a given level of risk from that of
predictions of price movements· in the market. He introduced a multi-period model allowing
evaluation on a period-by-period basis and also on a cumulative basis. He was of the opinion that,
return on a portfolio constitutes of return for security selection and return for bearing risk. His
contributions combined the concepts from modern of portfolio selection and capital market
equilibrium with more traditional concepts of good portfolio management. The research work by
Friend, et al., (1962), Sharpe (1966), Treynor and Mazuy (1966), Jensen (1968), and Tito (1969)
and Fama (1972)19 contributed for the development of the theoretical modeling and in framing
the methodology for the quantitative evaluation of mutual funds with risk-return as parameters.
Based on the methodology developed by the above authors a number of research work followed.
The following are the noteworthy studies carried out by academicians in the years to follow.
Friend, Blume and Crockett (1970)20 compared the performance of 86 funds with random
portfolios. The study concluded that, mutual funds performed badly in terms of total risk. Funds
with higher turnover outperformed the market. The size of the fund did not have any impact on
their performance. Robert Carlson's (1970)21 examined the overall performance of mutual funds
during the period 1948-1967. However, he laid emphasis on analyzing the effect of using different
indices, as a proxy for the market over different time periods. He reported that fund performance
relative to the market varied depending upon which index was used for the market viz., S&P 500,
NYSE Composite, or DJIA. He also analyzed performance relative to size, expense-ratio, and a
new-funds factor. The results indicated no relationship with size or expense ratio, although there
was a relationship between performance and a measure of new funds factor. Klemosky (1973)22
analyzed investment performance of mutual funds using quarterly returns for 40 funds during the
period 1966-1971. He identified some bias in Sharpe, Treynor, and Jensen measures. He
suggested that these could be removed by using mean absolute deviation and semi-standard
deviation as risk surrogates. In his opinion, the resultant performance measure was found to be
a.better measure of risk adjusted performance measure than the composite measures derived from
the capital asset pricing model.

8. Reference
 .Agarwal Vinod B, Prather Larry J, 1997, Economic Rent and Mutual Fund
Performance: An Empirical Investigation, Journal of Economics and Finance,
Volume 21, Number 2, .
 Anand, Shefali, 2006, Mutual Fund Hot Spot: India, Wall Street Journal - Easter
Edition, Vol 247, Issue 57,
 Bhalla V K, 1999, Security Analysis and Portfolio Management, S Chand &
Company Limited, New Delhi.
 Block Stanley B, French Dan W, 2002, The Effect of Portfolio Weighting on
Investment Performance Evaluation:

 The case of Actively Managed Mutual Funds, Journal of Economics and Finance,
Volume 26, Number 1. Bodie Zvi, Kane Alex, Marcus, Allan J, 2002, Investments,
Irwin McGrawHill Higher Education, New York.