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Wealth Management- Financial Planning & Research And Analysis of Indian Mutual Fund Industry

Summer Internship Program

A REPORT
ON

WEALTH MANAGEMENT – FINANCIAL PLANNING


&
RESEARCH AND ANALYSIS OF
INDIAN MUTUAL FUND INDUSTRY

By

A report submitted in partial fulfillment of the requirements of


MBA Program of SRM School of Management

Submitted To:

Corporate Guide: College Guide:


Acknowledgement

“Interdependence is a higher value than Dependence”

This report is a synergistic product of many minds.

It began on 18th March 2011, the day I was inducted as a summer trainee at Aditya Birla
Money. As an Amateur to the corporate environment, this training at Aditya Birla Money
has been a very insightful and exciting experience.

I am grateful for the inspiration and wisdom of many people for their insights and
encouragement. I cannot possibly mention the names of all those people who have enriched
and improved my thinking through their conversations. But without the names of some
people this project report would not be possible. This report has been analyzed and sharpened
by their intellectual prowess.

First and foremost, I would like to express my sincere regards to my project guide Mr. Sumit
Behl ( Area Manager – Wealth Management, Aditya Birla Money, Agra). Their vision and
the valuable time that they shared with me will always be a source of inspiration for me.

Then I would like to thank my Faculty guide, Dr. P. Ravilochanan, (Professor, SRM School
of Management, Chennai), who let me to initiate the project and provided valuable
suggestions and guidance during the whole project. His perspective has encouraged me to
incorporate a different dimension to the project.

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TABLE OF CONTENTS

Abstract vi

Project – A: Wealth Management and Financial Planning

1. Introduction
1.1. Company Profile 3
1.2. Rationale of the Project 3
1.3. Objective of the Project 4
1.4. Methodology 4
2. Strategy used in Planning and Managing Money 4
3. Investment Strategy 5
4. Benefits of Systematic Investment Planning 6
5. Comparative Analysis of ULIP 8
6. Findings
6.1. Case 11
6.2. Achievements 14
6.3. Recommendations 14
Project – B: Research and Analysis of Indian Mutual Fund Industry
1. Introduction
1.1. Rationale of the Project 16
1.2. Objective of the Project 17
1.3. Methodology 17
1.4. Limitations 17
2. Mutual Fund Industry in India
2.1. Mutual Fund – An Introduction 18
2.2. History of Indian Mutual Fund Industry 19
2.3. SEBI Regulations, 1996 21
2.4. Mutual Fund Structure 21
2.5. Type of Funds 22
2.6. Why invest in Mutual Funds? 23
3. Evaluation of Fund Houses and their Schemes

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3.1. Selection of Mutual Fund Houses 25
3.2. Return Analysis 26
3.3. Analysis of Equity Diversified Schemes 29
3.4. Analysis of Balanced Schemes 35
3.5. Analysis of Equity Linked Saving Schemes 39
3.6. Analysis of Short Term Debt Schemes 41
3.7. Analysis of Long Term Debt Schemes 46
4. Risk and Return Analysis
4.1. Risk and Reward Relationship 48
4.2. Types of Risks 49
4.3. Ways to Measure Risks 51
4.4. Risk Adjusted Performance of the Schemes 54
4.5. Tips to Minimize Risks 61
5. Investment through Mutual Funds versus other Investment
5.1. Growing Household Savings 62
5.2. Small Saving Schemes at a Glance 63
5.3. ELSS Advantage 64
6. Recommendations 65
7. Conclusions 67
8. References 68
9. Annexure 69

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List of tables:

TABLE NO. TITLE PG. NO.


1 Comparison of Investment Options 24
2 Selected Mutual Fund Houses 25
Point to Point and Rolling Returns of Equity
3 30-31
Diversified Funds
Point to Point and Rolling Returns of Balanced
4 36
Funds
5 Point to Point and Rolling Returns of ELSS funds 39
Point to Point and Rolling Returns of Short Term
6 41-42
Debt Funds
Point to Point and Rolling Returns of Long Term
7 46-47
Debt Funds
8 Risk and Ranking of Equity Diversified Schemes 54
9 Risk and Ranking of Balanced Schemes 57
10 Risk and Ranking of ELSS Schemes 59
11 Risk and Ranking of Short Term Debt Schemes 60
Distribution of Equity Investor Household based on
62
Income type
10 Small Saving Schemes at a Glance 63

List of Figures:

PG.
FIGURE NO. TITLE
NO

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1 SIP Vs Single Investment 7.
2 Market Shares of Premium collected by Insurance Companies 10
3 Mutual Fund Operation Flow Chart 18
4 Growth of Asset Under Management 20
NAV Performance Vs BSE Sensex for funds with more than 3
5 33
year of inception
NAV Performance Vs BSE Sensex for funds with less than 3
6 34
year of inception
7 NAV Performance Vs Crisil Balanced Index for funds 38
8 NAV Performance Vs BSE Sensex for ELSS 40
NAV Performance Vs Crisil Short Term Index for Short Term
9 44
Debt Funds with more than 3 years of inception
NAV Performance Vs Crisil Short Term Index for Short Term
10 45
Debt Funds with more than 3 years of inception
11 Risk Vs Return of different types of Mutual Funds 48
12 Relative Risk Analysis of Equity Diversified Schemes 55
13 Relative Risk Analysis of Balanced Schemes 57
14 Relative Risk Analysis of ELSS Schemes 59
15 Relative Risk Analysis of Short Term Debt Schemes 60

ANNEXURE

1 Risk and Return Ratios of Equity Diversified 69


Schemes
2 Risk and Return Ratios of Balanced Schemes 69
3 Risk and Return Ratios of ELSS Schemes 70
4 Risk and Return Ratios of Short Term Debt 70
Schemes

Abstract
 Project A – “Wealth management & Financial Planning” –

This project deals with understanding the different investment avenues and creation of
appropriate portfolio for the investor in the best possible way with minimum risk and
maximum returns. The investment options that Birla Money is dealing with are Life
Insurance, Mutual Funds and Portfolio Management Services.

 Project B – “Research Analysis of Mutual Fund Industry” –

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Savings form an important part of the economy of any nation. With savings invested in
various options available to the people, the money acts as the driver for growth of the
country. Indian financial scene too presents multiple investment avenues like Shares, Bonds
and Debentures, Bank and Company Deposits, National Saving Certificate, Kisan Vikas
Patra, PPF etc. Though certainly not the best or deepest of markets in the world, it has ignited
the growth rate in mutual fund industry to provide reasonable options for an ordinary man to
invest his savings. Investment goals vary from person to person. With objectives defying any
range, it is obvious that the products required will vary as well. Though still at a nascent
stage, Indian MF industry offers a plethora of schemes and serves broadly all type of
investors. Here arises a problem; there is still a large mass of people in India who harbour
confusion & hesitation in mind regarding mutual funds. The objective of this study is to make
people aware of the mutual fund industry, various schemes offered by it, which scheme is
suitable for them, Investing in Mutual Funds Vs Other Investment products, risks in Mutual
funds investment etc.

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Wealth Management – Financial Planning

Wealth Management
&
Financial Planning

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Wealth Management – Financial Planning

1. Introduction
1.1 Company Profile
Aditya Birla Money Ltd, formerly known as Apollo Sindhoori Capital Investment Ltd is a
leading player in broking space. The company is principally engaged in the business of stock
broking and related activities. They have one subsidiary company, namely Apollo Sindhoori
Commodities Trading Ltd. The company offers services such as, trading facility in equity
segment on and derivative segment on NSE & BSE through a single screen; trading facility in
commodity segment, including bullion, oils, gaur seed etc through their subsidiary;
depository Participant services of NSDL and CDSL at major locations; Online bidding for
IPO and distribution of mutual fund. The company is headquartered in Chennai. They are
having a strong distribution network of over 221 own and 687 franchisee branches, a large
customer base in excess of 175,000 and a scalable business model based on a strong
technology backbone and a wide product mix. Aditya Birla Money Ltd, a part of Aditya Birla
financial Services Group was incorporated in the year 1995 as Apollo Sindhoori Capital
Investment Ltd. Earlier, the company was promoted by Prathap C Reddy,Chairman of Apollo
Hospitals Group. In March 2009, the company became a part of Aditya Birla Group, when
the group acquired 76% of the company. The company commenced their operations in
Chennai in the year 1996. They spent their initial time in establishing and consolidating their
presence throughout South India Within four years, they established their presence in over
350 locations all over the country. During the year 2007-08, the company added 237 offices
and the client base stands at over 159,000 recording an impressive growth of 49% from
around 107,000 of previous year. The company's subsidiary, Apollo Sindhoori Commodities
Trading Ltd introduced Systematic Gold Saving Scheme for purchase of gold by investors
through Commodity Exchange. The scheme was initially launched in Tamilnadu and latter
the scheme was launched all over India. During the year 2008-09, the company added 43 new
branches including 18 offices placed in the premises of Birla Sun Life Distribution Ltd. In
August 28, 2008, the company entered into Share Purchase Agreement with Aditya Birla
Nuvo Ltd for sale of 56% equity shares of the company. Pursuant to this agreement, Aditya
Birla Nuvo Ltd made an open offer for purchase of 20% equity shares of the company, which
was completed on February 24, 2009. As a result, the company became a subsidiary of Aditya
Birla Nuvo Ltd with effect from March 6, 2009. The company changed their name from
Apollo Sindhoori Capital Investments Ltd to Aditya Birla Money Ltd with effect from
August 3, 2009

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1.2. Rationale of the Project


The main principle behind the project is Financial Planning.

1.2.1. Financial Planning - Introduction

Wealth Management is the next step in financial planning. It challenges advisers, especially
those with high-net-worth clients, to bring together all aspects of a client's financial life into a
single plan-from investment advice to estate planning to long-term-care insurance. The
components, and the methods of approaching them, vary as widely as the number of
practitioners who are moving into this area.

We plan for generally everything we do in life, be it career, success, travel, shopping or


family. But most of us do not plan for financial security and hence peace of mind. Most of the
times, we do not have the time to think about our own financial management. If we do have
the time, we may lack the required knowledge, expertise and research capabilities. Hence, we
often make decisions but after a while realize its incorrectness. Financial Planning is a critical
need and the implementation of a well crafted Financial Plan. It is like a blueprint for the
management of all our financial affairs for our entire life. Managing money is getting more
complicated hence Planning is as important as earning it nowadays.

A Financial Planner have to study and analyze gamut of investment products in the Indian
market ranging from Equities and derivatives trading, Commodities trading, Portfolio
Management Services, Mutual Funds, Life Insurance, Fixed deposits, GoI bonds and other
small savings instruments. Financial Planner has to guide clients on all financial matters that
have or will have an impact on their life today and in future. The primary responsibility of a
financial planner is to plan their financial affairs, then execute the plan and finally keep
monitoring their assets lifelong for the fulfillment of all their financial objectives.

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Wealth Management – Financial Planning

THE CREATION OF A FINANCIAL PLAN

Having a professionally made financial plan would provide solutions to the following issues
and many more;
• How to manage changing financial needs & requirements from time to time

• How to manage loans and other short & long term liabilities

• How to ensure that the budget never goes into a deficit

• What are the best strategies for hedging income & managing liabilities

• How to do a comprehensive planning for education funding during the time span of
the child’s career

• What provisions need to be made for retirement funding so as to have ample cash
flow during retired years and not make any compromises whatsoever

• How to be prepared for anything in life so as to have ample financial security

• How not to be left grappling for funds when we need them the most

• What is a good roadmap for long term wealth creation

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Wealth Management – Financial Planning

1.3. Objective of the study

1. To understand the various investment portfolio’s in the market like Equities and
derivatives trading, Commodities trading, Portfolio Management Services, Mutual
Funds, Life Insurance, Fixed deposits, GoI bonds and other small savings instruments

2. Make appropriate portfolio for the clients according to their requirements.

3. To ensure that the client achieves his/her lifetime financial objectives in the most
scientific & pragmatic manner.

1.4. Methodology

Training has been given to all the financial planners on Life Insurance, Mutual Funds and
Portfolio Management Services.
• Financial planners have to fix up an appointment with the HNIs (High Net worth
Individuals) and meet them either at residence or office based on their convenience.
• Financial planners have to identify and analyse the requirements of the clients and
make an appropriate portfolio based on their risk appetite.

2. Strategy used in planning and managing the money

Firstly, Financial Planner estimates an amount that is required for keeping as a safety margin.
Safety margin constitutes the amount required for protecting client’s family against liabilities
and the loss of income in his absence for which he needs an insurance cover. Once this cover
is in place, Financial Planner estimates the contingency funds that are needed to manage
emergencies. Deducting the amounts needed for the above, all the balance funds find their
way into assets capable of delivering highest possible returns. The Financial Planner then
estimates the fund requirements for retirement, child’s education, holiday’s and other
financial goals. Financial Planner would then prepare an investment plan, do the analysis and
create an appropriate portfolio based on the client’s risk appetite.

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Wealth Management – Financial Planning

3. Investment strategy
Let’s understand where we come from and where we are today…

Say 20 years back, it was a challenge to be in an employment that would pay well & provide
consistent opportunities to grow both financially and professionally. On the other hand,
investment strategies those days were rather straightforward. Most people would stay with
fixed interest instruments. The returns were pretty good; be it the NSC/PPF/Bonds/Insurance
policies or even bank deposits. PPF & pension policies would comfortably fund retirement
years. Most other requirements would be fulfilled via fixed deposits, insurance policies and
bonds. Further, there were defined benefits for retirement, job loyalty & security was the
norm, expectations were mediocre and our family values took care of most issues and
difficulties. It was a different world then.

Today it is not such a challenge to be able to earn reasonably well with double income
households, economy on a growth trajectory and opportunities abound in practically every
field. In fact we are generating far more investment surplus than our previous generations
ever did! Alongside with increasing income and surplus, our needs have expanded even more.
The mantra to get more out of life at every stage of life, whether it is to provide the best
future for children or a very comfortable retirement, or the ability to spend and buy what we
desire, or simply living and enjoying life. For e.g. A holiday abroad was a lifetime dream for
most Indians and today we think in terms of a long weekend in Venice or an evening in Paris
literally. The cost is perhaps 2-3 months salary and installments tend to make life easier. In
short, things are far more achievable today than before and we want even more. There is but
one flip side to all this. The traditional investment returns have shrunk and the old investment
strategies will just not work going forward. The obvious thing to do then is to look at
alternate investment strategies for wealth creation and those are quite complex today and will
get even more complex tomorrow.

The impending challenge is then how to best channel the surplus; given that most fixed
interest instruments today do not even beat inflation and that the impact of tax reforms will
make the situation even worse. It is not advisable to invest any money into FD’s, RD’s, bonds
etc. The returns are rather low and they do not even come close to providing a hedge against
inflation.

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4. Benefits of Systematic Investment Planning (SIP)


The BSE Sensex 30 has crossed the 11000 level and the upward march doesn’t seem to be
stopping. The Bull Run, which started in 2003-04, is the longest in the history of Indian
capital markets and has rewarded investors handsomely. The market is charting its own
course, proving market analysts and players wrong.

The market behavior has left the investors in a dilemma and with new landmarks being set;
the small investor’s confusion is mounting. Though apprehensive, they are still unwilling to
miss out on any opportunity to make the best of these booming conditions. However, this is
certainly a time of caution for the retail investors as they could be caught on the wrong foot.
The markets at this juncture no longer look cheap and valuations seem to be stretched when
compared with the other emerging markets.

The BSE Sensex is currently quoting at a P/E of around 21 times, the highest among
emerging markets. Dow Jones and FTSE 100 trade at multiples of about 18.5 and 15
respectively while emerging markets such as Brazil, China and South Korea are trading at
multiples of around 12, 18.5 and 11 respectively on a trailing 12-month P/E basis.

Investors should enter mutual funds or ULIPs irrespective of the market conditions.
Investment in a staggered manner through the systematic investment plan (SIP) route is the
safest bet as far as playing the markets is concerned, as it facilitates the advantages of rupee
cost averaging and is effective in handling the upswings and downswings of the markets.

The two most difficult decisions to be taken in equity investment are ‘when’ to invest and
‘where’ to invest. Investing in a mutual fund or ULIPs solves the issue of ‘where’ to invest
and SIP helps to overcome the problem of ‘when’ to invest. SIP is a disciplined investment
approach irrespective of the state of the market. It thus makes the market timing totally
irrelevant. And it makes all the more sense now when markets are booming.

As a fixed amount is invested regularly in a SIP, you end up buying more number of units
when the markets are down and the NAV is low and less number of units when the markets
are up and the NAV is high. Investors generally stay away from buying when the markets are
down and tend to invest when the markets are rising.

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SIP works as a good discipline as it forces us to buy even when the markets are low, which
actually is the best time to buy. The major benefits of SIP are:
1. Instills discipline in investing
2. Benefit of rupee cost averaging
3. Investment in small amounts instead of bulk investing
4. Lower risk and better returns
SIP Outperforms Single Investment

SIP Investment

Value of SIP Investment

Single Investment

BSE SENSEX 30
Interpretation
In the graph, the BSE Sensex 30 is plotted against the time between Jan-2005 to Nov-2010.
We can see from the graph that, a person who has invested a single investment of Rs. 71,000
in the BSE Sensex Stocks at the beginning of Jan-2005 has got 112,717 Rs whereas, a person
as invested as SIP has got Rs. 145,552 for the same investment of Rs. 71,000

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Products offered by Aditya Birla Money

Health Plan

Prevention is better than cure, focus on your loved ones’ health today
A Health Plan helps take care of an individual’s day-to-day preventive and pre-hospitalization
medical expenses. A Health Plan member benefits by getting services of high quality doctors,
dentist, pathology and radiology at significantly reduced cost. It covers virtually all doctor
specializations without any exclusion criteria like age, present medical condition etc.

Why choose a Health Plan?


Be guided as per your requirements to some of the best medical practitioners in India.

• Avail of free or subsidized medical consultations/ treatments across the network of


empanelled medical practitioners.

• No restrictions based on age or present or past medical condition – suitable for all
family members.

• No pre-defined spending limits or lengthy claim procedures.

Offerings

Aditya Birla Money brings you Health Plans in association with Indian Health Organization
Private Limited (IHO) to take care of all your preventive and pre-hospitalization expenses.
For the first time ever, be guided as per your requirements to a wide network of the
experienced medical practitioners in India, all at zero or subsidized costs. Avail of these
benefits at doctors, dentists and pathology/ radiology laboratories – with no age limits, no
exclusion for pre-existing diseases, no limits on usage, Aditya Birla Money – IHO card
Health Plans are surely the answer to take care of yourself and your loved ones’ healthcare
needs.
The Aditya Birla Money – IHO card Health Plan offers the following benefits across its
network of IHO empanelled medical practitioners, dentists and laboratories:

Dental Benefits
• No consultation fees charged by any dentist.

• 50% off on any Cleaning and X-rays at dentists.

• 30% (min 25%) off on all dental treatments.

Medical Benefits
• 2 consultations absolutely free with empanelled doctors every membership term, or.

• 50% off on all consultations with empanelled doctors.

• 20-25% off on any further treatments with doctor within clinic.

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Wealth Management – Financial Planning

Radiology
• 30% (min 20%) off on all radiology tests.

Pathology Benefits
• 30% (min 20%) off on all pathology tests.

Preventive Health Check-Up Benefits


• Health checkup vouchers as an enrollment benefit offering 50% savings on body
check ups. There are special vouchers designed for women as well.

Dial – a - Doctor
• Receive medical advice related to routine or minor illnesses instantly over the phone
from a qualified medical practitioner.

2nd Opinion
• For critical diseases, if you want a second opinion, you could get this free of cost from
the IHO panel of doctors.

The Aditya Birla Money - IHO Health Plan network presently covers the following cities:
Mumbai, Delhi, Gurgaon, Noida, Faridabad, Bangalore, Chennai, Kolkata, Pune, Hyderabad,
Ahmedabad, Cochin, Jaipur, Vadodara, Surat, Sonepat, Ghaziabad & Chandigarh.

With more than 1,800 of the finest medical practitioners in the country empanelled, the
Aditya Birla Money –IHO network is perhaps bigger than the largest hospitals in India.

MF Insta - Invest

With Aditya Birla Money’s MF Insta-Invest, transact online in Mutual Funds with a click of a
button. It’s convenient, simple and gives you direct control over your investments.

With MF Insta-Invest you can

Transact Online
Buy, Sell, Switch or Set SIP/STP/SWP online

Performance Monitoring
Monitor Real-Time portfolio valuation online

WRAP Portfolio
Invest online in a readymade portfolio designed by ABMML Research that suits your Risk
Profile.

Net Banking Options


Choice to Register and transact online from your account with any of 17 Banks

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Mutual Fund Wrap

‘Mutual Fund Wrap’ is an advisory facility that enables you to allocate your investment
across Mutual Fund Schemes based on your investment goal, time horizon and risk profile
(aggressive, moderately aggressive, balanced, moderate or conservative).

‘Mutual Fund Wrap’ facility is designed on the scientific principle of risk profile and asset
allocation. An empirical study done by Brinson, Hood and Beebower in 1986-91 on
Determinant of Portfolio Performance concluded that “Asset Allocation helps explain over
93% of a portfolio’s performance”.

Three Steps to buy online mutual fund WRAP portfolio

Assess Your Risk Profile


Identify your risk profile, by taking up a short questionnaire.

Select Online WRAP


Select WRAP portfolio as per your Risk Profile & Asset Allocation.

Buy Online WRAP


Enter investment amount and choose net banking account to buy WRAP online.

How to register for MF Insta-Invest?


The registration process is simple. To open an account, submit the following documents with
duly filled registration form to our branch. Please take back to back print out of Registration
Form.

• Self attested copy of KYC acknowledgement


• Self attested copy of PAN Card
• Copy of cancelled cheque of the account mentioned in registration form

Mutual Funds

Let the experts help you grow your money


A Mutual Fund is a trust that pools together the savings of a number of investors who share a
common financial goal. The fund manager invests this pool of money in securities, ranging
from shares, debentures to money market instruments or in a mixture of equity and debt,
depending upon the objective of the scheme. 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.

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Why Invest in Mutual Funds?

Professional Management
Fund managers are professionals who track the market on an ongoing basis. With their mix of
professional qualification and market knowledge, they are better placed than the average
investor to understand the markets.

Diversification and Lowered Risks


Since a mutual fund is a trust that pools the savings of a number of investors sharing a
common financial goal, the associated risks are greatly reduced. This is also because a fund
will invest your money in different types of instruments like shares and bonds. Hence, loss in
one sphere will not greatly affect your overall investment status.

Low Costs
When compared to direct investments in the capital market, mutual funds cost less. This is
due to savings in brokerage costs, Demat costs, depository costs, etc.

Liquidity
Investments in mutual funds are quite liquid and hence can be redeemed at the Net Assets
Value (NAV)–related price on any working day.

Transparency
All that you invest in a scheme is made known to you and you are periodically informed
about all the updates and changes taking place

Flexibility
Mutual funds offer flexibility in their options and schemes to match individual needs. Also,
with features like regular withdrawal plans and systematic investment plans, you can
withdraw or invest funds according to your needs and convenience.

Choice of Schemes
Mutual funds offer a vast variety of well-designed schemes and options that you can choose
from depending on your risk appetite.

Tax Benefits
In India, these funds become even more attractive because of the tax advantage, indexation
benefits, long term capital gains tax, tax free dividends and much more.

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6. Findings
6.1. Case

Personalized financial planning can benefit anybody and everybody. The most important
thing that a financial planner looks for in his client’s portfolio is not his present bank balance
but the amount he should have in future to meet his basic needs and fulfill his dreams.

J.K Mehra (46) is working as an accountant in a private company in Agra. His family consists
of his wife (non-earning) and his only son (23 years), who works in a BPO company.
Mehta owns a studio apartment in Mathura, which is leased out currently. He is living in a
rented apartment in Sadar Bazaar, which is conveniently located near his and his son’s work
place. In spite of being a man with limited resources, he has always tried to provide the best
possible education to his son. In this pursuit he has taken an educational loan for his son’s
computer course. His son secured a job in August 2009, and since then Mehra has been
repaying Rs 24,000 per annum towards repayment of the education loan, which will be
completed in 5 years. Apart from the apartment at Mathura, which is currently valued at
around Rs 3 lakh, his financial assets are negligible. Mehra doesn’t have a provident fund
account with his employer.
Goals:

By defining and quantifying the goals we will be able to set a financial strategy.
a) Short-term goals (less than 3 years): Mehra plans to take a home loan after a year to
purchase a flat in Sadar Bazaar. He estimates the cost to be around Rs10 lakh. He
plans to source the same by selling off his flat at Mathura for Rs 3 lakh and he plans
to take a home loan for the remaining amount of Rs 7 lakh.

b) Medium-term goals (3-10 years): Mehra would like to get his son married in next 4
years.

c) Long-term goals (greater than 10 years): He would like to create wealth for his son (Rs
25 lakh in the next 25 years).

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Diagnosis and comments:

1. Mehra’s savings are very less for his age.


2. The probability of a radical increase in his future income is highly unlikely. He still
has not started building up a retirement nest. Mehra is still repaying his son’s
education loan, instead of contributing towards his retirement fund. He will be taking
up another liability of home loan in a year’s time.
3. Mehra does not have a proper insurance cover to protect his assets from unforeseen
contingencies. We have conducted a thorough prognosis of his finances and
recommended certain measures, wherein we advised him to re-prioritize his financial
goals. On the basis of the revised goals, we fine tuned his finances to take care of his
basic needs.

Recommendations:

1) Mehra should let his son repay the educational loan, since his son has started his career as
a professional and in all probability will come under the tax net within a short span of time.

2) His current household expenses of Rs 90,000 per annum seem appropriate considering the
present high cost of living; still we would like him to do a thorough analysis of each of the
head of expenditures.

3) Mehra would be able to save around Rs 2000 per month if his son starts paying the
education loan. Out of this, Mehra can put 50% in a bank account as an emergency fund,
thereby building an emergency fund for the next 2-5 years.

4) Mehta’s next priority is to start a program for his retirement savings. Considering his
present situation, we advised him to stretch his work life to a minimum 65 years. He may
continue with the same company or may always look for some alternative assignment post-
retirement. This may also involve investing in building up certain additional skills, which will
suit him.

5) If he can pull back his Rs 2000 per month (Rs 1000 from savings in educational loan outgo
and Rs 1000 from part-time assignments) into balanced mutual funds for the next 20 years, he

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can expect a savings of around Rs 20 lakh (expecting a market return of 12% per annum for
the next 20 years). Further, any additional money that may come in his way can be put into
this retirement fund studiously. Though highly necessary, his resources do not allow an
allocation for a life cover because it will be too expensive.

6) We strongly discourage him to take a home loan at this stage because neither he has the
additional cash flow to repay the loan nor he will be able to purchase an accommodation,
which will be big enough for his family in this budget.

7) Further, high interest rates on loan, prices of property peaking, high maintenance costs,
besides the point that he will not get tax benefit on the loan, are some of the factors indicating
that buying a new house will give him no benefits. Rather he should maintain his Mathura
flat, where he may move in at a more appropriate time.

8) So far as his son is concerned, since he will start repaying the educational loan, his savings
potential (excluding the statutory savings) will get reduced from the present Rs 4,500 per
month to Rs 2,500. He needs to take a term life insurance policy of a minimum of Rs 10 lakh
along with a family health insurance policy. The two covers will come at an approximate cost
of Rs 500 per month. 25% of the remaining money shall be put into an emergency fund in a
bank. Rs 1,500 shall be invested monthly in a basket of diversified equity mutual fund for the
next 25 years, which will eventually reach the desired target of funds for him.

9) Mehra should plan to get his son married, as and when his income is enough to
comfortably substantiate the needs of his future family.

10) The remedial actions may be implemented with stringent discipline and the success be
reviewed for best results.

15
Wealth Management – Financial Planning

6.2 Achievements
1. Mutual Funds worth 2 lakh
2. ULIP worth 3 lakh
6.3. Recommendations
As firms enter the wealth management arena, they will have to answer important questions
about the methods used to deliver their unique value proposition to their chosen customers,
the role of technology in serving those customers profitably and their strategy for
differentiating themselves in a fiercely competitive market. The following four competencies
address customer needs that enable firms to create sustainable competitive advantage in
attractive customer segments.
1. Advisory Relationship
The core of any successful wealth management offering is the relationship developed
between the advisor and the client. Successful advisors develop a relationship with clients by
demonstrating that the clients’ interests are the advisor’s paramount concern.
2. Perception
To win new customers and retain existing ones, wealth management firms must be perceived
as competent, dependable and empathetic. Clients must also perceive that they are paying a
justified price for the value that they are receiving. Client opinion is formed through a
combination of personal experience, word of mouth and marketing.
3. Personal touch
A major component of successful wealth management offerings is human touch. Clients
respond to charismatic guidance and a high level of attention; they feel valued when their
queries are addressed promptly and personally. Firms that go above and beyond expected
levels of service will reap substantial rewards.

The customer is the most important visitor in our premises.


He is not dependent on us. We depend on him.
He does not disturb our work. He is the purpose of it.
He is not a stranger in our business. He is a part of it.
We do not do him a favour when we serve him. He does us a favour by giving us an
opportunity to do it.
-- Mahatma Gandhi

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Research and Analysis of Indian Mutual Fund Industry

RESEARCH AND ANALYSIS


OF INDIAN MUTUAL FUND INDUSTRY

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Research and Analysis of Indian Mutual Fund Industry

1. Introduction
1.1. Rationale of the Project
'Put your money in trust, not trust in money' entices the small investors, who generally lack
expertise to invest on their own in the securities market and prefer some kind of collective
investment vehicles, which can pool their marginal resources, invest in securities and
distribute the returns there from among them on co-operative principles. The investors benefit
in terms of reduced risk, and higher returns arising from professional expertise of fund
managers employed by such investment vehicle. This was the original appeal of mutual funds
(MFs) which offer a path to stock market far simpler and safer than the traditional call-a-
broker-and-buy-securities route. This caught the fancy of small investors leading to
proliferation of MFs. In developed financial markets, MFs have overtaken bank deposits and
total assets of insurance funds. In the USA, the number of MFs far exceeds the number of
listed securities.

MFs, thus, operate as CIV (Collective Investment Vehicle) that pools resources by issuing
units to investors and collectively invests those resources in a diversified portfolio comprising
of stocks, bonds or money market instruments in accordance with objectives disclosed in the
offer document issued for the purpose of pooling resources. The profits or losses are shared
by investors in proportion to their investments. The process gathered momentum in view of
regulatory protection, fiscal concession and change in preference of investors. The first ever
MF in India, the Unit Trust of India (UTI) was set up in 1964. This was followed by entry of
MFs promoted by public sector banks and insurance companies in 1987. The industry was
opened up to private sector in 1993 providing Indian investors a broader choice. Starting with
an asset base of Rs. 25 crore in 1964, the industry has grown exponentially to Rs. 231,862
crore at the end of March 2006. The number of households owning units of MFs exceeds the
number of households owning equity and debentures.

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Research and Analysis of Indian Mutual Fund Industry

1.2. Objective of the Project

Measuring and evaluating fund performance of fund houses, investing through mutual
funds versus other investment products, risks in fund investing, developing an
investment portfolio, and selecting the right funds.

1.3. Methodology:

Interaction with Aditya Birla Money officials, Collection of information from websites,
journals, magazines & newspaper Articles

1.4. Limitations of the Study

As Mutual Fund Investment is Subject to Market Risk the Findings, Analysis &
Conclusion of this Study may not hold good in future.

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Research and Analysis of Indian Mutual Fund Industry

2. Mutual Fund Industry in India

2.1 Introduction

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.
The flow chart below describes broadly the working of a mutual fund:

Mutual Fund Operation Flow Chart

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Research and Analysis of Indian Mutual Fund Industry

2.2. History of the Indian Mutual Fund Industry

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at
the initiative of the Government of India and Reserve Bank the. The history of mutual funds
in India can be broadly divided into four distinct phases.

First Phase – 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 had Rs.6,700 crores of assets under management.

Second Phase – 1987-1993 (Entry of Public Sector Funds)

The year 1987 marked the entry of non- UTI, public sector mutual funds set up by public
sector banks and Life Insurance Corporation of India (LIC) and General Insurance
Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established
in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual
Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda
Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its
mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under
management of Rs.47,004 crores.

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
(Mutual Fund) Regulations 1996.

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Research and Analysis of Indian Mutual Fund Industry

Fourth Phase – since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was
bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of
India with assets under management of Rs.29, 835 crores as at the end of January 2003,
representing broadly, the assets of US 64 scheme, assured return and certain other schemes.
The Specified Undertaking of Unit Trust of India, functioning under an 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, sponsored by SBI, PNB, BOB and LIC. It is registered
with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the
erstwhile UTI which had in March 2000 more than Rs.76, 000 crores of assets under
management 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 industry has entered its current phase of consolidation and growth.
The graph indicates the growth of assets over the years.

(Source AMFI)

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Research and Analysis of Indian Mutual Fund Industry

2.3. Securities and Exchange Board of India (Mutual Funds) Regulations,


1996

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.

SEBI‘s New Amendment

Open-Ended Schemes launched after 4th April 2006 will not be allowed to charge the initial
issue expenses. These schemes have to recover the marketing & distribution expenses from
the entry load itself. Only close ended schemes will be allowed to charge the NFO expenses,
which they will write off during their lifetime. But close ended scheme would not be allowed
to charge any entry loads.

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Research and Analysis of Indian Mutual Fund Industry

2.4. Mutual Funds Structure

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.

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.

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Research and Analysis of Indian Mutual Fund Industry

2.5. Type of Funds

Schemes according to Maturity Period:

A mutual fund scheme can be classified into open-ended scheme or close-ended scheme
depending on its maturity period.
Open-ended Fund/ 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 Fund/ 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.

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:

Equity Funds: A mutual fund that invests predominantly in Equity shares of companies.

Income / Debt Fund: A mutual fund that invests in all types of fixed-Income securities.

Balanced fund: A mutual fund which invests in equity shares, debentures, government bonds
and Unit Trust certificates so as to balance gain with risk.

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Research and Analysis of Indian Mutual Fund Industry

Money Market or Liquid Fund: A mutual fund which invests solely in short- term debt
instruments like treasury bills, trade bills etc.

Gilt Fund: A mutual fund which invests in government guaranteed securities.

Index Funds: A mutual fund whose portfolio of shares is identical to a well known index,
such as the S&P CNX Nifty.

Sector Fund: A mutual Fund that invests in equity shares of companies operating in a
particular sector of the economy.

Exchange Traded Fund: An exchange traded fund representing a basket of stocks that
trades on the exchange through out the day with intra-day pricing.

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Research and Analysis of Indian Mutual Fund Industry

2.6. Why invest in Mutual Funds?

Benefits of Mutual Funds:

There are numerous benefits of investing in mutual funds and one of the key reasons for its
phenomenal success in the developed markets like US and UK is the range of benefits they
offer, which are unmatched by most other investment avenues.
1. Professional Management
2. Diversification
3. Convenient Administration
4. Return Potential
5. Low Costs
6. Liquidity
7. Transparency
8. Flexibility
9. Tax benefits
10. Well Regulated
The table below compares the investment options under the broad heads viz. return, safety,
volatility, liquidity and convenience

Investment Convenience Return Safety Volatility Liquidity


Option
Equity High High Low High High
FI Bonds Moderate Moderate High Moderate Moderate
CD’s Moderate Moderate Moderate Moderate Low
Company FD’s Moderate Moderate Low Low Low
Bank Deposits High Moderate High Low High
PPF Moderate Moderate High Low Moderate
Life Insurance Moderate Low High Low Low
Gold Moderate Low High Moderate Moderate
Real Estate Low High Moderate High Low
Mutual Funds High High High Moderate High
3. Evaluation of Fund Houses and Their Schemes

3.1. Selection of Mutual Fund Houses

Till 31st march 2009 there were 32 Mutual Fund Houses in India. The name of these Mutual
Fund Houses with their respective no. of schemes and corpus.

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Research and Analysis of Indian Mutual Fund Industry

Out of the 32 Mutual Fund House we picked up the Mutual Fund Houses with more than
9000 Cr of Assets under Management (AUM). For a Mutual Fund to perform well in market
it needs a sufficient Corpus size. So that it can invest in various options available in the
market and reduce its risk accordingly. It’s not necessary that any fund house with large
corpus size will perform better but larger the corpus – greater the diversification of risk.
Therefore, the fund houses with corpus size more then 9000 crores are selected. The funds
with AUM more then 9000 crores are as follows –

Selected Mutual Fund Houses, their number of schemes and corpus as on 31st mar 2010 –

Serial No. Mutual Fund Name No. Of. Corpus – in Crores


Schemes
1 Birla Mutual Fund 157 15012.64
2 DSP Merrill Lynch Mutual Fund 60 10795.45
3 Franklin Templeton Investments 136 17826.59
4 HDFC Mutual Funds 95 21549.78
5 HSBC Mutual Funds 70 9219.76
6 Kotak Mahindra Mutual Funds 90 9940.64
7 Prudential ICICI Mutual Fund 172 23502.12
8 Reliance Mutual Fund 106 24669.65
9 SBI Mutual Fund 85 13185.55
10 Standard Charted Mutual Fund 136 9411.52
11 Tata Mutual Fund 145 9716.68
12 UTI Mutual Fund 140 29519

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Research and Analysis of Indian Mutual Fund Industry

3.2. Return Analysis

Performance Evaluation Parameters

 Point to point return

 Rolling return

 Benchmarking the fund

 Expense ratio

3.2.1. Return

Return is the gain or loss for a security in a particular period, consisting of income plus
capital gains relative to investment. It is usually quoted as a percentage. The general rule is:
the more risk you take the greater the potential for higher return and loss.

Absolute Return (less than a year)

• The return that an asset achieves over a period of time.


This measure simply looks at the percent appreciation or depreciation that an asset faces over
a period of time, usually a stock or mutual fund. Absolute return differs from relative return
in that it is concerned with the return of the asset being looked at and does not compare it to
any other measure. For example if there has been a 100% increase in the NAV of a fund over
the past year then the holders of that fund have achieved a absolute return of 100% over the
past year

Annualized Returns (more than or equal to 1 year)

It standardizes returns generated in a greater than a year to a per year basis thereby facilitating
easy measurement and comparison of performance. It takes into account the fact that the
return of an investment over all the periods under measurement is compounded, i.e. the fund's
returns in previous periods are accrued.

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Research and Analysis of Indian Mutual Fund Industry

3.2.2. Point to Point Return


In the point to point to point return the returns are calculated as of a particular date. In this
Study the returns are calculated as Of 31st Mar- 2010. Here the 3 year return will be
calculated from as on 31st Mar – 2007 to 31st Mar-2010. Here there are only two data points
i.e. 31st Mar – 2007 and 31st Mar-2010. Here the returns will be calculated between the NAV
prevailing on 31st Mar – 2007 & on 31st Mar – 2010. The time period between 31st Mar –
2007 to 31st Mar-2010 is not taken into consideration.

3.2.3. Rolling Return


In the rolling return the returns are between two different dates here for e.g. from 1-Apr-2007
to 1-Apr-2010, calculated on a daily, weekly, monthly or yearly basis. In this Study it is
calculated on a monthly basis. It is more appropriate measure of performance than Point To
Point returns since here the returns are calculated on a monthly basis between two different
time periods.

3.2.4. Benchmarking the Fund


All mutual funds schemes have different objectives and therefore their performance would
vary. But are there some standards for comparison? Schemes are usually benchmarked
against commonly followed market indexes. The relevant index can be chosen after taking
into consideration the asset class of the scheme. But switching the benchmarks, conclusions
could be misleading.

Benchmarking also requires a relevant time period of comparison. Ideally, one should
compare the performance of equity or an index fund over a 1-2 year horizon. Short-term
volatile price movements would distort any comparison over a shorter period. Similarly, the
ideal comparison period for a debt fund would be 6-12 months while that for a liquid/money
market fund would be 1-3 months.

In this case the performance of NAVs Vs Benchmark Index has been taken on a 3 Year Basis
computed on monthly basis. Here while comparing the performance of the schemes with the
benchmark index first we have to normalize the each individual schemes with the benchmark
index. Here normalization is done by applying month difference to the NAV Values. As

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Research and Analysis of Indian Mutual Fund Industry

markets are not rational, there is no methodology in the world to scientifically predict stock
prices. Therefore it is not possible for anyone to beat the market on a consistent basis and
hence there is no guarantee that the fund manager would perform well all the while.
The Benchmark Indexes used in our analysis are:

• BSE Sensex 30 – Equity Diversified Fund


• BSE Sensex 30 – ELSS Fund
• CRISIL Balanced Funds Index – Balance Fund
• CRISIL Composite Debt Fund Index – Income Funds

The indices are based on each fund’s outstanding units at the end of each month and its daily
NAV. Entry and exit loads are not taken into consideration. The index computation is done
monthly. The index calculations have been done using the chain-link method, where past
values are used on a daily rolling basis to determine present values. The NAVs used are
adjusted to account for corporate events such as dividend declarations, rights or bonus issues.
3.2.5. Expense Ratio

Expense Ratio is the percentage of assets that are spent to run a mutual fund. It is also
referred to as the management expense ratio (MER). Annual recurring expenses are charged
to the fund on a regular basis. These include investment management and advisory fees
(AMC fees), trustee fees, custodian fees, registrar’s fees, broker remuneration, audit fees, cost
of fund transfer, cost of providing account statements to investors, cost of statutory
advertisements and other expenses. A 1.5% expense ratio means the AMC charges Rs1.50 for
every Rs100 in assets under management.
• The lower this figure, the more cost-effective the fund.

A higher expense ratio can be justified only by superlative returns. It is very crucial in a debt
fund, as it will devour a few percentages from your modest returns. Normally, the costs of
running a fund grow slower than the growth in the fund size - so, the more assets in the fund,
the lower should be its expense ratio.

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Research and Analysis of Indian Mutual Fund Industry

3.3. Analysis of Equity Diversified Schemes


The 6 month, 1 year, 2 years and 3 years point to point returns of all the equity diversified
funds of the 10 fund houses are calculated as on 31st March 2010. The point to point return of
the BSE Sensex 30 for the same period is also calculated. Only those funds which outperform
the BSE Sensex 30 were considered for the further analysis.
The Top-23 funds, which came into analysis, are as follows:
Birla SunLife Equity Fund
DSP ML Opportunities Fund
DSP ML Tiger Fund
Franklin India Flexi Cap Fund
Franklin India Opportunity Fund
HDFC Equity Fund
HDFC Top 200 Fund
HSBC India Opportunities Fund
Kotak 30 Fund
Kotak Opportunities Fund
Pru ICICI Discovery Fund
Pru ICICI Power Fund
Pru ICICI Dynamic Plan Fund
Pru ICICI Emerging S.T.A.R Fund
Reliance Equity Opportunities Fund
Reliance Growth Fund
SBI Magnum Global Fund
SBI Magnum Midcap Fund
SBI Magnum Multiplier Plus 93 Fund
Tata Equity opportunity Fund
Tata Infrastructure Fund
Tata Select Equity Fund
UTI Thematic Mid-cap Fund

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Research and Analysis of Indian Mutual Fund Industry

The Point to Point Returns of the funds are calculated on an annualized basis from 31st
March 2007 to 31st March 2010. For those funds which started after March 2007 are
calculated from 31st March 2009 to 31st March 2010.
From 31st March 2007 to Equity Diversified
31st March 2010 Point to Point Return
Expense 6 month 1 year 2 year 3 year
Scheme Ratio Actualized Annualized Annualized Annualized Avg Rank
SBI Magnum Multiplier Plus 93 2.50 42.98 111.50 76.95 86.88 1
Reliance Growth 1.96 31.83 92.28 74.55 101.03 2
SBI Magnum Global Fund 94 2.25 36.99 103.23 81.45 74.73 3
Tata Select Equity Fund 2.50 45.96 91.35 66.18 81.43 4
Birla SunLife Equity Fund 2.35 33.02 93.93 67.28 85.27 5
PruICICI Dynamic Plan(G) 2.16 38.85 98.51 68.79 73.14 6
Tata Equity oppurtunty Fund 2.35 37.73 85.94 59.68 92.40 7
HDFC Equity Fund 1.95 36.63 90.23 56.98 78.76 8
Pru ICICI Power (G) 2.18 37.30 90.58 56.85 75.47 9
HDFC Top 200 Fund 2.18 37.71 84.02 55.25 79.62 10
DSP ML Opportunities Fund 2.20 36.71 83.72 55.68 80.45 11
Franklin India Opportunity Fund 2.26 35.91 93.01 57.63 67.58 12
Kotak 30 2.50 34.59 85.12 53.64 72.47 13
Average 2.26 37.40 92.57 63.92 80.71
Index
BSE Sensex 30.64 73.73 42.04 54.67

Equity Diversified
From 31st Mar 2009 to 31st Mar 2010
Point to Point Returns
Expense 6 month 1 year
Scheme Ratio Actualized Annualized Rank
Kotak Opportunities Fund - Growth 2.00 44.23 102.90 1
DSP Tiger 2.30 40.67 98.40 2
HSBC India oppurtunities Fund 2.30 42.33 92.54 3
PruICICI Emerging S.T.A.R(G) 2.31 34.71 109.48 4
Tata Infrastructure Fund 2.13 42.94 89.24 5
Reliance Equity Opportunities Fund 1.90 42.48 85.92 6
Sbi Magnum Midcap 2.50 37.69 91.27 7
Franklin India Flexi Cap Fund 1.97 39.06 89.83 8
UTI Thematic Mid-cap 2.00 32.58 83.80 9
Average 2.16 93.71
BSE Sensex 30.88

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Research and Analysis of Indian Mutual Fund Industry

The Rolling Returns of the funds are calculated from 31st March 2006 to 31st March 2010 on
a monthly basis for 6 months, 1 year, 2 years and 3 years. For those funds which started after
March 2002, the rolling returns are calculated from 31st March 2009 to 31st March 2010.

From 31st Mar 2006 to 31st Mar 2010 Equity Diversified


Rolling Return
Expense 6 month 1 year 2 year 3 year
Scheme Ratio Actualized Annualized Annualized Annualized Avg Rank
Reliance Growth - Growth 1.96 33.80 82.41 78.25 79.95 1
Tata Equity oppurtunity Fund 2.35 31.36 76.15 67.93 70.53 2
Birla sunlife equity fund 2.35 27.48 66.60 63.32 64.02 3
HDFC Top 200 Fund 2.18 28.14 65.55 58.33 62.20 4
HDFC Equity Fund 1.95 28.10 65.35 57.48 62.04 5
Tata Select Equity Fund 2.50 26.47 60.98 55.78 57.88 6
PruICICI Dynamic Plan(G) 2.16 28.86 58.81 51.83 60.06 7
PruICICI Power (G) 2.18 26.11 59.72 53.51 57.08 8
Sbi Magnum Multiplier 2.50 26.13 59.51 52.97 56.02 9
Kotak 30 2.50 24.45 56.02 53.89 54.21 10
Sbi Magnum Global 2.25 23.19 52.38 47.86 50.12 11
Franklin India Opportunities Fund 2.36 22.32 49.76 47.53 47.47 12
DSP ML Opportunities Fund 2.20 24.49 47.10 36.60 40.43 13
Average 2.26 26.99 61.56 55.79 58.62

Equity Diversified
From 31st Mar 2009 to 31st Mar 2010
Rolling Return
Expense 6 month
Scheme Ratio Actualized Rank
PruICICI Emerging S.T.A.R(G) 2.31 40.00 1
DSP Tiger 2.30 39.77 2
Franklin India Flexi Cap Fund - Growth 1.97 36.97 3
Sbi Magnum Midcap 2.50 35.13 4
Kotak Opportunities Fund - Growth 2.00 34.17 5
HSBC India oppurtunities Fund 2.30 33.51 6
UTI Thematic Mid-cap 2.00 33.50 7
Tata Infrastructure Fund 2.13 31.98 8
Reliance Equity Opportunities Fund 1.90 31.37 9
Average 2.16 35.15
BSE Sensex 30.88

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Research and Analysis of Indian Mutual Fund Industry

Inception period more than 3 years

Top 3 funds based on Point to Point Returns


1. SBI Magnum Multiplier 93
2. Reliance Growth
3. SBI Magnum Global fund
Top 3 funds based on Rolling Returns
1. Reliance Growth
2. Tata Equity Opportunity
3. Birla Sunlife Equity

Inception period less than 3 years

Top 3 funds based on Point to Point Returns


1. Kotak Opportunities
2. DSP Tiger
3. HSBC India Opportunities

Top 3 funds based on Rolling Returns


1. Pru ICICI Emerging STAR
2. DSP Tiger
3. Franklin India Flexi Cap

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Research and Analysis of Indian Mutual Fund Industry

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Research and Analysis of Indian Mutual Fund Industry

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Research and Analysis of Indian Mutual Fund Industry

3.4. Analysis of Balanced Funds


The 6 month, 1 year, 2 years and 3 years point to point returns of all the Balanced Funds of
the 10 fund houses are calculated as on 31st March 2010. The point to point return of the
Crisil Balanced Fund Index for the same period is also calculated. Only those funds which
outperform the Index were considered for the further analysis.
The Top-14 funds, which came into analysis, are as follows:
1. HDFC Prudence
2. DSP Balanced fund
3. Birla 95
4. Tata Balanced Fund
5. Pru ICICI CCP Gift
6. Pru ICICI Balanced Fund
7. SBI Magnum Balanced Fund
8. FT India Balanced Fund
9. Franklin India Balanced Fund
10. Birla Balance Fund
11. HDFC Balanced Fund
12. UTI Balanced Fund
13. Kotak Balance
14. UTI Unit Scheme 2002

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Research and Analysis of Indian Mutual Fund Industry

From 31st March 2007 to Balanced Schemes


31st March 2010 Point to Point Return
Expense 6 month 1 year 2 year 3 year
Scheme Ratio Actualized Annualized Annualized Annualized Avg Rank
SBI Magnum Balanced Fund - Growth 2.50 27.96 68.49 53.92 51.12 1
HDFC Prudence 2.01 22.23 60.90 44.84 58.47 2
Tata Balnaced Fund 2.46 29.59 52.80 41.74 50.32 3
Pru ICICI CCP Gift (G) 2.30 25.33 56.91 37.36 51.10 4
DSP ML Balanced Fund - Growth 2.04 26.83 53.58 37.22 49.99 5
Pru ICICI balanced fund (G) 2.28 22.36 54.98 39.88 48.43 6
Birla 95 Fund 2.45 18.61 53.90 37.23 49.70 7
FT India Balanced Fund - Growth 2.38 20.55 47.59 30.72 44.41 8
Franklin India Balanced Fund 2.38 20.53 47.55 31.52 42.68 9
HDFC Balanced Fund 2.21 19.30 44.57 31.40 40.99 10
UTI unit scheme-2002(G) 2.30 23.30 43.74 27.02 33.57 11
UTI Balanced fund (G) 2.30 21.47 42.82 29.98 40.41 12
Birla Balance 2.44 20.21 42.35 27.22 42.57 13
Average 2.31 22.94 51.55 36.16 46.44
Index
Crisil Balanced Fund Index 17.97 38.34 22.38 31.60

Balance Fund
From31st Mar 2006
to 31st Mar 2010 Rolling Return
6 month 1 year 2 year 3 year
Scheme Actualized Annualized Annualized Annualized Avg Rank
HDFC Prudence 22.33 51.37 46.21 49.94 1
DSP ML Balanced Fund - Growth 17.85 40.44 38.90 39.58 2
Birla 95 Fund 17.28 39.67 37.94 38.74 3
Tata BalnacedFund 17.32 39.14 36.59 38.20 4
Pru ICICI CCP Gift (G) 17.22 38.90 36.94 37.93 5
Pru ICICI balancedfund(G) 17.17 38.00 35.74 37.33 6
SBI Magnum Balanced Fund 17.16 38.15 33.82 36.86 7
FTIndia Balanced Fund - Growth 15.95 36.07 34.89 35.08 8
Franklin India Balanced Fund 15.62 34.83 33.27 34.19 9
Birla Balance 15.05 34.10 32.10 33.18 10
HDFC BalancedFund 14.49 32.08 30.82 32.22 11
UTI Balancedfund(G) 13.79 30.69 30.30 30.30 12
Average 16.77 37.79 35.63 36.96
Index
Crisil BalancedFund Index 11.06 23.46 22.26 22.94

39
Research and Analysis of Indian Mutual Fund Industry

All the top 14 funds are started before 3 years

Top 3 funds based on Point to Point Returns


1. SBI Magnum Balance
2. HDFC Prudence
3. Tata Balance
Top 3 funds based on Rolling Returns
1. HDFC Prudence
2. DSP ML Balance
3. Birla 95

40
Research and Analysis of Indian Mutual Fund Industry

3.5. Analysis of Equity Linked Saving Schemes (ELSS)


The 6 month, 1 year, 2 years and 3 years point to point returns of all the ELSS funds of the
10 fund houses are calculated as on 31st March 2006. The point to point return of the BSE
Sensex 30 for the same period is also calculated. Only those funds which outperform the BSE
Sensex 30 were considered for the further analysis.
The Top-5 funds, which came into analysis, are as follows:
1. Pru ICICI Tax Gain
2. HDFC Tax Saver
3. HDFC Long Term Advantage
4. SBI Magnum Tax Gain Scheme
5. Birla Sunlife Capital Tax Relief 96
Point To Point Returns
Scheme Name 6 month 1 year 2 year 3 year
Actualised Actualised Annualised Annualised

SBI Magnum Tax Gain Scheme 93 60.821 103.670 96.981 115.050 1


Birla SunLife TaxRelief 96 34.870 82.360 39.970 60.830 4
HDFC Tax Saver 32.15 94.23 80.85 91.65 2
HDFC Long Term Advantage 32.13 80.87 66.62 86.99 5
Pru ICICI tax plan(G) 25.58 83.22 82.63 96.49 3
Average 37.110 88.870 73.410 90.202
INDEX - SENSEX 78 42 54

From 31st Mar 2006 to 31st Mar 2010 Rolling Return


6 month 1 year 2 year 3 year
Scheme Actualized Annualized Annualized Annualized Avg Rank
Pru ICICI Tax Gain 31.34 76.30 71.04 73.57 1
HDFC Tax Saver 30.60 75.23 71.06 73.02 2
HDFC Long Term Advantage 30.56 73.85 71.28 71.72 3
Birla SunLife Capital Tax Relief 96 20.41 46.38 41.08 43.00 4
Average 28.23 67.94 63.62 65.33
Index
BSE Sensex 18.10 38.91 35.55 37.29

Top 2 Funds based on Point to Point Returns


1. SBI Magnum Tax Gain Scheme
2. Birla SunLife Tax Relief 96
Top 2 Funds based on Rolling Returns
1. Pru ICICI Tax Gain
2. HDFC Tax Saver

41
Research and Analysis of Indian Mutual Fund Industry

3.6. Analysis of Short Term Debt Schemes

The 6 month, 1 year, 2 years and 3 years point to point returns of all the Short Term Debt
Funds of the 10 fund houses are calculated as on 31st March 2010. The point to point return
of the Crisil Short Term Index for the same period is also calculated. Only those funds
which outperform the Index were considered for the further analysis.
The Top-12 funds, which came into analysis, are as follows:
1. Pru ICICI short term plan
2. Tata Short Term Bond Fund
3. DSP ML Short Term Fund
4. Templeton GSF - Treasury Plan
5. DSP ML G Sec Fund - Plan B (STD)
6. Tata Income Plus - Plan A
7. Tata Income Plus - Plan B
8. Tata Income Fund (App)
9. UTI G-sec fund-STP
10. Tata Dynamic Bond- Plan A
11. Tata Dynamic Bond- Plan B
12. UTI Children’s career bond

Debt Short Term - Point to Point Return


Schemes 3 yr 2 yr 1 yr 6 mth Average Ranking
Pru ICICI short term plan 5.72 5.42 5.48 2.31 4.73 1
Tata Short Term Bond Fund 5.50 5.32 5.63 2.06 4.63 2
DSP ML Short Term Fund 5.34 4.71 5.24 2.36 4.41 3
Templeton GSF Treasury
Plan 5.45 4.61 5.17 2.17 4.35 4
DSP ML G Sec Fund - Plan B
(STD) 5.03 4.33 5.29 2.66 4.33 5
Tata Income Plus - Plan A 5.23 2.89 6.14 1.97 4.06 6
Tata Income Plus - Plan B 5.25 2.93 6.13 1.70 4.00 7
CRISIL Short Term Bond
Fund Index 4.04 1.73 3.29 0.58 2.41

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Research and Analysis of Indian Mutual Fund Industry

Debt Short Term - Point to Point Return


Schemes 3 yr 2 yr 1 yr 6 mth Ranking
Tata Income Fund (App) - 4.85 9.23 6.79 1
UTI G-sec fund-STP - 4.36 5.39 2.46 2
Tata Dynamic Bond- Plan A - 4.51 6.65 2.34 3
Tata Dynamic Bond- Plan B - 4.40 6.45 2.15 4
UTI Children’s career bond - 2.75 5.27 1.37 5
CRISIL Short Term Bond Fund Index 4.04 1.73 3.29 0.58

Debt Short Term - Rolling Return


Schemes 3 yr 2 yr 1 yr 6 mth Average Ranking
Templeton GSF Treasury plan 6.78 6.42 6.88 3.49 5.89 1
Pru ICICI short term plan 5.99 5.72 6.01 3.02 5.19 2
Tata Short Term Bond Fund 5.87 5.55 5.77 2.91 5.03 3
DSP ML Short Term Fund 5.44 5.11 5.32 2.69 4.64 4
DSP G-Sec Fund STD 5.22 4.95 5.25 2.68 4.53 5
Tata Income Plus Plan A 5.00 3.69 4.25 2.46 3.85 6

Debt Short Term Plan - Rolling Return


Schemes 3 yr 2 yr 1 yr 6 mth Ranking
Tata Dynamic Bond Fund - Option B - 2.30 4.53 4.61 1
Tata Dynamic Bond Fund - Option A - 2.29 4.51 4.59 2
UTI G-sec fund-STP - 2.19 4.69 4.46 3
UTI Children’s Career Bond - 1.80 4.16 2.75 4
TATA Income Fund - -0.99 9.20 - 5

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Research and Analysis of Indian Mutual Fund Industry

Inception period more than 3 years

Top 3 funds based on Point to Point Returns


1. Pru ICICI short term plan
2. Tata Short Term Bond Fund
3. DSP ML Short Term Fund
Top 3 funds based on Rolling Returns
1. Templeton GSF Treasury plan
2. Pru ICICI short term plan
3. Tata Short Term Bond Fund
Inception period less than 3 years

Top 3 funds based on Point to Point Returns


1. Tata Income Fund (App)
2. UTI G-sec fund-STP
3. Tata Dynamic Bond- Plan A
Top 3 funds based on Rolling Returns
1. Tata Dynamic Bond Fund - Option B
2. Tata Dynamic Bond Fund - Option A
3. UTI G-sec fund

44
Research and Analysis of Indian Mutual Fund Industry

crisil

45
Research and Analysis of Indian Mutual Fund Industry

N A V P e r f o r m a n c e V s In d e x

1300
In d e x

T a ta In c P la n
1250 A
U ti G ilt A d v P F

T a ta D y n -A
1200
T a ta In c o m e

T a ta S T B o n d
1150
Index

P r u IC IC I S T P

1100 U ti G S e c S T P

U ti C C B -G

1050 D sp M L S T P

T a ta D y n -B

1000
30 S ug, 200 4

31 Dov, 200 4

30 S ug, 200 5

30 Dov, 200 5
30 aJy, 200 4
31 uJn, 20404

31 Meb, 200 5

30 aJy, 200 5
30 uJn, 20505

31 Meb, 200 6
31 Jec, 200 4

31 Jec, 200 5
28 F an, 2004

28 F an, 2005
31 A ul, 200

31 MApr, 20005
31 M pr, 2004

30 ar, 20 5

31 A ul, 200

ar, 2 6
006
30 N ct, 200

30 N ct, 200
30 eOp, 20044

31 eOp, 20055
30 Aar, 200
31 M

M o n th s - M a r c h 0 4 to M a rc h 0 6

46
Research and Analysis of Indian Mutual Fund Industry

3.7. Analysis of Long Term Debt Schemes


The 6 month, 1 year, 2 years and 3 years point to point returns of all the Long Term Debt
Funds of the 10 fund houses are calculated as on 31st March 2006. The point to point return
of the Crisil Short Term Index for the same period is also calculated. Only those funds
which outperform the Index were considered for the further analysis.
The Top-8 funds, which came into analysis, are as follows:
1. Pru ICICI long term plan
2. UTI Bond fund
3. Pru ICICI gilt(TP)
4. HDFC High Interest STP
5. Pru ICICI flexible income
6. UTI Gilt Advantage -LTP
7. UTI Gilt Advantage -LTP PF
8. UTI Gilt Adv -LTP PF (PDAR)
Debt Long Term - Point to Point Return
Schemes 3 yr 2 yr 1 yr 6 mth Average Ranking
Pru ICICI long term plan 8.65 8.44 6.58 2.10 6.44 1
UTI Bond fund 5.61 4.67 7.79 1.38 4.87 2
Pru ICICI gilt(TP) 6.10 4.49 5.28 2.94 4.70 3
HDFC High Interest STP 5.18 4.79 5.76 3.01 4.68 4
Pru ICICI flexible income 5.81 3.38 4.85 1.51 3.89 5
UTI Gilt Advantage -LTP 5.94 2.22 5.14 1.79 3.77 6

Debt Long Term - Point to Point Return


Schemes 3 yr 2 yr 1 yr 6 mth Ranking
UTI Gilt Advantage -LTP PF 2.18 5.07 1.80 1
UTI Gilt Adv -LTP PF (PDAR) 2.19 5.10 1.80 2

Long Term Plans - Rolling Return


Schemes 3 yr 2 yr 1 yr 6mth Average Ranking
Pru ICICI long term plan
(G) 5.00 9.90 8.74 9.82 8.37 1
UTI Gilt Advantage LTP 4.89 9.41 7.43 8.89 7.66 2
UTI Bond Fund - Growth 3.43 6.53 5.48 6.37 5.45 3
Pru ICICI Gilt TP G 3.07 6.19 5.85 6.18 5.32 4
Pru ICICI Flexible Income
G 3.03 5.36 4.67 6.09 4.79 5

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Research and Analysis of Indian Mutual Fund Industry

Debt Long Term - Rolling Return


Schemes 3 yr 2 yr 1 yr 6 mth Ranking
UTI Gilt Advantage Fund - L T - PF
Plan – PDAR - 2.59 2.69 1.37 1

Inception period more than 3 years

Top 3 funds based on Point to Point Returns


1. Pru ICICI long term plan
2. UTI Bond fund
3. Pru ICICI gilt(TP)
Top 3 funds based on Rolling Returns
1. Pru ICICI long term plan (G)
2. UTI Gilt Advantage LTP
3. UTI Bond Fund
Inception period less than 3 years

Top 2 funds based on Point to Point Returns


1. UTI Gilt Advantage -LTP PF
2. UTI Gilt Adv -LTP PF (PDAR)
Top 3 funds based on Rolling Returns
1. UTI Gilt Advantage Fund - L T - PF Plan - PDAR

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Research and Analysis of Indian Mutual Fund Industry

4. Risk and Return Analysis


4.1. Risk and Reward Relationship
Most investments usually involve some element of risk. It’s the uncertainty around the
potential performance of the investment that can sometimes cause concern. The important
thing to remember is that risk can be managed, and sometimes even minimized. The aim of
most investors is to invest in assets that will generally provide the best returns for their money
within the level of risk they are comfortable with.

To begin with, let us understand the concept of risk on an investment. Consider the returns
generated by two equity stocks, A and B, over a 5-year period.
Stock A: 25%, 12%, 4%, 22%, and 7%.
Stock B: 16%, 13%, 11%, 17% and 13%.
Both Stock A and Stock B have provided average returns of 14% during the 5-year period.
However, it is clearly evident that Stock A is a riskier investment because its returns have
fluctuated more widely than that of Stock B. In other words, higher the volatility (variability)
of the returns, greater will be the risk of the investment.

As you can see from the chart, choosing the right mutual fund should not depend entirely on
the mutual fund's returns. Before investing, you should consider the risk profile of the mutual
fund you plan to purchase.

(Source: www.morningstar.com)

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Research and Analysis of Indian Mutual Fund Industry

4.2. Types of Risks

Mutual funds are not immune to risk. Risk is as inherent to mutual funds as, say, its fund
manager is. One cannot wholly eliminate risk in mutual fund investments; one can only
reduce it to an extent. Mutual fund plans have varying degrees of risk, depending upon the
fund’s management style and its objective; it’s important that one should know the different
types of risk involved

1. Volatility: As the instruments that the funds invest in are marked to market (tradable
at a certain price in the market), their NAVs are automatically subject to the price
movements of these securities. Which means the NAV may move down just as surely
as it moves up. Neither the principal nor the returns are assured: in fact, SEBI does not
allow it. The volatility, however, varies from scheme to scheme: debt funds are less
volatile than equity funds because the former invest more in fixed-income, non-
government securities, where the volatility is lower.
2. Scrip Concentration: Although one of the key benefits of mutual funds is that
investments are diversified across many instruments, schemes sometimes concentrate
on a few scripts. This is risky, as the NAV movement will then depend largely on the
performance of these few securities. A rise in even a few of these scripts can push up
the NAV considerably; a fall in even one pulls it down as sharply.
3. Sector concentration: Like scrip diversification, the fund needs to diversify across
sectors as well–unless otherwise mandated, as in a sector fund. This ensures that its
fortunes do not ride on a few sectors alone. Take the case of the IT boom in 2000.
Based on phenomenal gains made by InfoTech companies during this period, many
equity-diversified funds went overboard on IT. All went well till the sector crashed,
NAV’s came tumbling down and investors incurred huge losses
4. Large individual holding: It’s important for a fund to have a diversified investor
base. This ensures that the fund’s investment and management policies are not skewed
towards a few select investors.
5. Strategy risk: This refers to the balanced fund dividing its corpus between equity
and debt, or the equity fund investing significantly in equity instruments or your debt
fund investing significantly in debt instruments. Although SEBI doesn’t stipulate the
debt-equity proportion for balanced funds, most balanced funds are equity-oriented

50
Research and Analysis of Indian Mutual Fund Industry

and, therefore, invest between 40 and 60 per cent in equity instruments and the
balance in debt. It is okay if the fund breaches these limits once in a while, but if it
does so regularly, avoids it. Continuous breaching of set limits is a warning, as the
deviation from mandate can give returns inconsistent with expectations
6. Market Risk: At times the prices or yields of all the securities in a particular market
rise or fall due to broad outside influences. When this happens, the stock prices of
both an outstanding, highly profitable company may be affected. This change in price
is due to "market risk". It is also known as systematic risk.
7. Inflation Risk: Sometimes referred to as "loss of purchasing power." Whenever
inflation rises forward faster than the earnings on your investment, one run the risk
that he'll actually be able to buy less, not more. Inflation risk also occurs when prices
rise faster than your returns.
8. Credit Risk: In short, how stable is the company or entity to which one lends his
money when one invests? How certain is one that it will be able to pay the interest one
is promised, or repay the principal when the investment matures?
9. Interest Rate Risk: Changing interest rates affect both equities and bonds in many
ways. Investors are reminded that "predicting" which way rates will go is rarely
successful. A diversified portfolio can help in offsetting these changes.
10. Exchange risk: A number of companies generate revenues in foreign currencies and
may have investments or expenses also denominated in foreign currencies. Changes in
exchange rates may, therefore, have a positive or negative impact on companies which
in turn would have an effect on the investment of the fund.
11. Liquidity Risk: Liquidity risk arises when it becomes difficult to sell the securities
that one has purchased. Liquidity Risk can be partly mitigated by diversification,
staggering of maturities as well as internal risk controls that lean towards purchase of
liquid securities.
12. Changes in the Government Policy: Changes in Government policy especially in
regard to the tax benefits may impact the business prospects of the companies leading
to an impact on the investments made by the fund.

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Research and Analysis of Indian Mutual Fund Industry

4.3. Ways to measure risks

An investor would naturally be interested in finding out the return generated for the risk
undertaken, as, in a bid to generate super-normal returns; the fund may go overboard on the
risk parameter. Therefore, risk-adjusted measures of return are needed to evaluate the
performance of funds. There are several such measures prominent among which are as
follows:

1. Standard Deviation: It measures the variability i.e. how much the returns will
deviate from the average. The greater the standard deviation, the greater the variability
in the returns i.e. higher the risk.
2. Beta ratio: It is a widely used measure of risk. It is the true relationship between
returns given by a security and the benchmark index. If the beta ratio for a stock is 1.4
then that stock can rise or fall 1.4 times the market, i.e. it is more volatile.
3. Sharpe Ratio: This ratio measures how much return a security has given per unit of
risk, where risk is measured by Standard Deviation. It measures the risk adjusted
performance of any security against a risk-free asset like T-Bill.
The formula is SR (x) = | R - r| / StdDev (R)
Where, SR is the Sharpe ratio , x is amount of investment , R is the average annual rate of
return of x , r is the best available rate of return of a risk-free like T-Bill, StdDev(R) is the
standard deviation of R
The higher the Sharpe ratio, the better the risk / reward relationship of the investment.
4. The Treynor Ratio: Developed by Jack Treynor, this performance measure evaluates
funds on the basis of Treynor's Index. This Index is a ratio of return generated by the
fund over and above risk free rate of return during a given period and systematic risk
associated with it (beta). Symbolically, it can be represented as:
Treynor's Index (Ti) = (Ri - Rf)/Bi.
Where, Ri represents return on fund, Rf is risk free rate of return and Bi is beta of the fund.
All risk-averse investors would like to maximize this value. While a high and positive
Treynor's Index shows a superior risk-adjusted performance of a fund, a low and negative
Treynor's Index is an indication of unfavorable performance

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Research and Analysis of Indian Mutual Fund Industry

Comparison of Sharpe and Treynor

Sharpe and Treynor measures are similar in a way, since they both divide the risk premium
by a numerical risk measure. The total risk is appropriate when we are evaluating the risk
return relationship for well-diversified portfolios. On the other hand, the systematic risk is the
relevant measure of risk when we are evaluating less than fully diversified portfolios or
individual stocks. For a well-diversified portfolio the total risk is equal to systematic risk.
Rankings based on total risk (Sharpe measure) and systematic risk (Treynor measure) should
be identical for a well-diversified portfolio, as the total risk is reduced to systematic risk.
Therefore, a poorly diversified fund that ranks higher on Treynor measure, compared with
another fund that is highly diversified, will rank lower on Sharpe Measure.

5. Jensen’s alpha: Jensen’s Measure represents the extra return over and above the
expected return. Expected return is calculated by using the market return, portfolio
beta and risk free rate of return. Positive Jensen’s measure indicates that the fund has
been able to outperform the benchmark index. Within a group of funds the highest
alpha represents the best performing fund. A portfolio with a consistently positive
excess return (adjusted for risk) will have a positive alpha.
6. Fama Model: The Eugene Fama model is an extension of Jenson model. This model
compares the performance, measured in terms of returns of a fund with the required
return commensurate with the total risk associated with it. The difference between
these two is taken as a measure of the performance of the fund and is called net
selectivity. The net selectivity represents the stock selection skill of the fund manager,
as it is the excess return over and above the return required to compensate for the total
risk taken by the fund manager. Higher value of which indicates that fund manager
has earned returns well above the return commensurate with the level of risk taken by
him.
Required return can be calculated as: Ri = Rf + Si/Sm*(Rm - Rf)

Where, Sm is standard deviation of market returns. The net selectivity is then calculated by
subtracting this required return from the actual return of the fund.

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Research and Analysis of Indian Mutual Fund Industry

Among the above performance measures, two models namely, Treynor measure and Jenson
model use systematic risk based on the premise that the unsystematic risk is diversifiable.
These models are suitable for large investors like institutional investors with high risk taking
capacities as they do not face paucity of funds and can invest in a number of options to dilute
some risks. For them, a portfolio can be spread across a number of stocks and sectors.
However, Sharpe measure and Fama model that consider the entire risk associated with fund
are suitable for small investors, as the ordinary investor lacks the necessary skill and
resources to diversify. Moreover, the selection of the fund on the basis of superior stock
selection ability of the fund manager will also help in safeguarding the money invested to a
great extent. The investment in funds that have generated big returns at higher levels of risks
leaves the money all the more prone to risks of all kinds that may exceed the individual
investors' risk appetite.

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Research and Analysis of Indian Mutual Fund Industry

4.4. Risk Adjusted Performance of the Schemes


Methodology:
The Sharpe, Fama, Treynor and Jenson ratios of all the funds in each category is calculated
on a daily basis from 31st March 2009 to 31st March 2010. The average returns of the funds
are also calculated on a daily basis for the same period. The funds are then separately ranked
on all the parameters in each category. The average of these ranks are calculated in each
category and ranked accordingly.
The standard deviation and average returns of the funds are plotted in each category. The
average of the standard deviation and average returns of the funds in each category is
considered as a benchmark. If the fund’s standard deviation is above the average standard
deviation in that category, those funds are considered as more risky.
A BCG matrix is created based on the standard deviation and average returns.
• First Quadrant – High Risk & High Return
• Second Quadrant – Low Risk & High Return
• Third Quadrant – Low Risk & Low Return
• Fourth Quadrant – High Risk & Low Return

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Research and Analysis of Indian Mutual Fund Industry

4.4.1. General Equity---Diversified--- Open Ended --- GROWTH


Equity Diversified Schemes

Schem e
56
Research and Analysis of Indian Mutual Fund Industry

Relative Risk Return Analysis (Equity Diversified Schemes)

Low Risk High Return High Risk High Return


SBI Magnum Multiplier Plus 93
SBI Magnum Global
Kotak Opportunities Pru ICICI Emerging STAR

SBI Magnum Midcap


Returns (1 year)

DSP ML Tiger
Pru ICICI Dynamic Plan
Franklin India Flexicap
Franklin India Opportunity
Birla Sunlife Equity
Tata Select Equity
Tata Infrastructure
HDFC Equity
Pru ICICI Power

Kotak 30

HDFC Top 200 Tata Equity Opportunity

Pru ICICI Discovery


DSP ML Opportunities UTI Thematic Mid Cap

Reliance Growth HSBC India Opportunities


Reliance Equity Opportunities
Standard Deviation
Low Risk Low Return (1 year)
High Risk Low Return

57
Research and Analysis of Indian Mutual Fund Industry

In the Risk Adjusted Returns of the Equity Diversified Funds, the performance of SBI
Magnum Multiplier Plus 93 is the best. It is No.1 in the ranking of 3 out of 5 parameters.
The performance of the SBI Magnum Global Fund is almost at par with the magnum
multiplier fund. Higher these measures the better a fund’s returns have been relative to the
amount of investment risk it has taken. The Reliance Equity Opportunities Fund is having
lowest ranking in all the measures and is considered as highly risky.

The standard deviation tells us how much the return on the fund is deviating from the
expected normal returns.
• The higher the number, the more volatile the fund.
SBI Magnum Global Fund is the safest fund as it gives high returns with low volatility.
Therefore, this fund is good for conservative investors. SBI Magnum Multiplier 93 Fund is
giving high returns but is slightly more volatile than SBI Magnum Global Fund. This fund
might be risky for investing as it is in (2) Quadrant. The (3) Quadrant shows funds with High
risk & Low return, HSBC Equity Opportunity Fund falls in this category as it is highly
volatile with low returns. Reliance Growth and Equity Opportunity Fund falls in (4) Quadrant
is a fund with Low Risk & Low Returns, investors.

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Research and Analysis of Indian Mutual Fund Industry

4.4.2. Balanced--- Open Ended --- GROWTH

Schem
SBI M a
Returns (1 year)

SBI Magnum Balanced Fund


HDFC Prudence Fund
Kotak Balance Fund
DSP ML Balanced Fund Prudential ICICI Balanced Fund

Birla SunLife 95 Fund Tata Balanced Fund

HDFC
FT India Balanced Fund
Franklin India Balanced Fund

Unit Scheme 2002 Fund HDFC Balanced Fund

UTI Balanced Fund

Birla Balance Fund

Low Risk High Return High Risk High Return

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Research and Analysis of Indian Mutual Fund Industry

Standard Deviation (1 year)


Low Risk Low Return High Risk Low Return

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Research and Analysis of Indian Mutual Fund Industry

In the Risk Adjusted Returns of the Balanced Funds, the performance of SBI Magnum
Balanced Fund is the best. It is No.1 in the ranking of 3 out of 5 parameters. The
performance of the HDFC Prudence Fund is almost at par with the Magnum Balanced fund.
Higher these measures the better a fund’s returns have been relative to the amount of
investment risk it has taken. The HDFC Balanced Fund is having lowest ranking in all the
measures and is considered as highly risky.
The standard deviation tells us how much the return on the fund is deviating from the
expected normal returns. HDFC Prudence is the safest fund as it gives high returns with low
volatility. SBI Magnum Balanced Fund and Kotak Balanced Fund are giving high returns but
are also highly volatile. This fund might be risky for investing.

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Research and Analysis of Indian Mutual Fund Industry

4.4.3. General Equity---ELSS--- Open Ended --- GROWTH

R a n k in g
S ch e m e A v e r a g e R e tuSr hn a r p e T r e y n o r F a m aJ e n s e n 's A Al pvhga R a n kRi na gn k
S B I M a g n u m T a x G a i n S c h e m e 923 1 1 1 1 1.2 1
H D F C L o n g T e r m A d v a n ta g e F u n4 d 2 2 2 2 2.4 2
H D F C T a x sa v e r - G r o w th 1 3 4 3 3 2.8 3
P r u d e n ti a l I C I C I T a x p l a n - G r o w th3 4 3 4 4 3.6 4

Low Risk High Return High Risk High Return

HDFC Taxsaver - Growth


SBI Magnum Tax Gain Scheme 93
Returns (1 year)

HDFC Long Term Advantage Fund Prudential ICICI Tax Plan

Standard Deviation (1 year)


Low Risk Low Return High High Risk Low Return

In the Risk Adjusted Returns of the Equity Linked Saving Schemes, the performance of SBI
Magnum Tax Gain Scheme is the best. It is No.1 in the ranking of 4 out of 5 parameters. All
the 4 ELSS perform pretty well in all the parameters.
The standard deviation tells us how much the return on the fund is deviating from the
expected normal returns. SBI Magnum Tax Gain Scheme is the safest fund as it gives high
returns with low volatility. HDFC Tax Saver has given the highest return, but the volatility is
also high.

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Research and Analysis of Indian Mutual Fund Industry

4.4.4. General Debt—Short Term-- Open Ended --- GROWTH

Scheme Average Fama Sharpe Treynor Jensen Rank


Tata Dynamic Bond Fund - Option A 2 6 1 2 2 1
Tata Income Fund 1 12 2 1 1 2
Tata Dynamic Bond Fund - Option B 3 7 3 3 3 3
Tata Income Plus Fund - RIP - (Option A) 4 9 4 4 5 4
Tata Short Term Bond Fund 6 2 7 7 6 5
Tata Income Plus Fund - HIP - (Option B) 5 10 5 5 4 6
Prudential ICICI STP 7 1 9 10 7 7
UTI G-Sec Fund - STP 8 4 10 8 9 8
DSP ML G Sec Fund - Plan B - S T D 9 3 12 12 8 9
UTI Childrens Career Bond Plan 11 11 6 6 12 10
DSP ML Short Term Fund 10 5 11 11 10 11
Templeton GSF - Treasury Plan 12 8 8 9 11 12

LowRiskH ighReturn HighRiskHighReturn

Tata Income Fund


Tata Dynamic Bond Fund ( OptionA) Tata Income plus Fund -RIP(PlanA)
Returns (1 year)

Tata Dynamic Bond Fund (OptionB) Tata Income plus Fund -RIP(PlanA)

UTI Children ’s Career Bond Plan


Templeton GSF - Tre asury plan
Tata Short TermBondFund
DSPMLShort TermFund
UTI G - Sec Fund
Prudential ICICI ST P
DSPMLG -Sec Fund

StandardDeviation(1 year)
LowRiskLowReturnHigh HighRiskLowReturn

In the Risk Adjusted Returns of the Short Term Debt funds, the performance of Tata
Dynamic bond (Option A) is the best. Tata Income Fund is good in all the parameters except
the Fama Model, wherein it got the last rank.
The standard deviation tells us how much the return on the fund is deviating from the
expected normal returns. Majority of the Short Term Funds are in the “low risk low return
quadrant”. Tata Income fund gives high returns with high volatility.

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Research and Analysis of Indian Mutual Fund Industry

4.5. Tips to Minimize Risk

1. Manage Asset Allocation: One can reduce risks by having a proper asset allocation
plan. It is not a 100% guaranteed way of removing all kinds of risks, but it is a way by
which One can protect One self from market fluctuations by considering them and
balancing his investment portfolio. Proper asset allocation takes all kinds of securities
into consideration and uses them effectively to achieve higher returns at a given level
of risk
2. Regular Investment: One can protect oneself against market fluctuations over a long
period of time by investing regularly.
3. Understand the Risk profile: It is important for one to understand your risk profile.
Risk profile depends on two things:
• Risk capacity: Risk capacity depends on One’s financial situation and how
much risk you can take.
• Risk tolerance: It depends on how much risk one can take psychologically.

4. Set the investment objectives: Work out how much return will make one happy and
meet One’s needs. What are the future goals and what kind of investments can help
achieve these goals?
5. Know the timeframe: The amount of time available to invest is also critical in
determining which investments may suit One’s needs and in managing investment
risks. The longer one has to invest, generally the more risks one can take with your
investments, as there is more time for one to ride out the peaks and troughs of
investment performance. Alternatively, investors nearing retirement may wish to
invest in low risk investments where the likelihood off fluctuation in investment
performance is significantly reduced.
6. Diversify the investments: By spreading investments around, one is not as affected
by (or “exposed to”) the movements of just one market, some of which may rise,
while others may fall.

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Research and Analysis of Indian Mutual Fund Industry

5. Investment through Mutual Funds versus other Investment


5.1. Growing Household Savings
India has a high household savings ratio. Indians, like most people anywhere, are
conservative in their habits, and it would take many years substantially to change behavior
particularly when it comes to the use of their savings.
The table below shows the SEBI-NCAER Survey of Indian Investors, March 2003 showed the
Distribution of Equity Investor Households by Type of Income. It can be clearly viewed from
the table that holdings of Mutual Fund Units were extremely less as compared to Fixed
deposit, PPF, LIC etc. It was more between the income levels of Rs 10001-15000 & above
15000 categories of households.

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Research and Analysis of Indian Mutual Fund Industry

5.2. Small Saving Schemes at a Glance


SCHEME RATE DENOMINATION AND LIQUIDITY
INVESTMENT LIMITS
Public 8% p.a. compounded Maximum Rs.70,000 Maturity after 15 years, loan
Provident Yearly Minimum Rs.100 per year, available after 3 years and
Fund in lump sum or in 12 onwards, upto max of 25% of
installments with amount balance at the end of preceding
in multiples of Rs.5 year. Part withdrawal allowed
after 7 years.
National 8% p.a. Compounded Minimum Rs.100, No Maturity after 6 years, No
Savings Half Yearly maximum limit, premature withdrawal allowed
Certificate denominations of Rs.100,
Rs.500, Rs.1000, Rs.5,000
and Rs.10,000
Recurring Rs.10 per month Minimum Rs.10 per month Maturity after 5 years, can be
Deposit returns Rs.728.90 on or any amount in multiples extended for further 5 years
Account maturity of Rs.5, No maximum One withdrawal up to 50% of
limit the balance allowed after 1 year,
closure allowed after 3 years
with different rate of interest
Monthly 8% per annum plus Minimum Rs.1000, further Maturity period is 6 Years,
Income 10% bonus on deposit in multiple of Premature withdrawal is
Scheme maturity Rs.1000, up to Rs.300,000 possible after one year upto 3
in case of individual and years with 5% discount, and
Rs.600,000 in case of joint withdrawal is possible after 3
account years without any discount and
without bonus.
Kisan Vikas Money doubles in 8 Minimum Rs. 100, No Maturity period 8 years 7
Patra years and 7 months maximum limit months, premature withdrawal is
possible.
Time 6.25 %-1 year Minimum Rs. 200, No Account can be opened for 1
Deposit 6.50 %-2 year maximum limit year to 5 year. 2,3,5 years
7.25 %-3 year account can be closed after one
7.50 %-4 year year with discounted rate of
interest, account can be closed
after completion of 6 months but
before 1 year with no interest.
Savings 3.5% per year Minimum Rs. 50 any Withdrawal anytime without
Bank further deposit in multiple notice.
Account of Rs. 5 with maximum
balance of Rs. 100,000 in
case of single account and
Rs. 200,000 in joint acc.

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Research and Analysis of Indian Mutual Fund Industry

5.3. The ELSS Advantage


Tax Savings is a very important part of financial planning. Post tax returns are what really
matters at the end of the day as the real income from investments comes from what you earn
after paying all taxes. Equity Linked Savings Schemes (ELSS) is an ideal way to save on tax
as well as staying invested in equity mutual funds. ELSS schemes have been introduced in
India to promote investments in equity markets by giving tax concessions to the investors.
ELSS is basically equity-diversified scheme and has a lock in period of three-years.

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Research and Analysis of Indian Mutual Fund Industry

6. Recommendations
1. Continue to reduce the attractiveness of government guaranteed schemes
Unless the attractiveness of the government guaranteed schemes continues to be reduced, it
will be impossible for any adviser honestly to recommend investment in mutual funds until
after their clients have achieved the maximum exposure to government guaranteed schemes
that is permitted.
Reducing the level of returns on these schemes will also bring India more into line with the
usual risk/return ratios whereby lower risk products only offer lower returns: the fact that
high returns are available currently on low risk products is skewing Indian investors’
perceptions of risk.

2. Make mutual funds more comprehensible

 Make fund structures and investment objectives (and investment and borrowing
powers) clearer, more distinctive and more comprehensible to ordinary people
 Make disclosure more relevant, simpler and clearer and more capable of comparison
3. Give Professionalized financial advice & Educate Investors

As the affluence of Indians increases and the range of financial products available to meet
people’s needs expands – mortgages, deposits, life products, defined contribution pensions,
mutual funds, etc – the need for financial advice will increase.

Asset management companies of mutual funds should be encouraged or even instructed to


open offices or develop distribution in areas outside the major cities, the main market at
present. It is quite clear from the above that:

 Government-sponsored instruments ‘crowd out’ mutual funds since for the majority of
Indians, buying mutual funds before they have their full complement of government-
backed savings instruments would be both wrong and foolish
4. Channel small savings from the household sector to the mutual fund industry over the
period 2004-2010

To channelize the savings from the household sector, we need to concentrate on the ‘B’ and
‘C’ class cities, which are growing at a rapid pace. Today most of the mutual funds are
concentrating on the ‘A’ class cities since the cost involved in acquisition of big investors is

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Research and Analysis of Indian Mutual Fund Industry

small. But they should realize that stability in the fund would come with the presence of small
retail investors.

5. Rural Penetration

Mutual fund can penetrate into rural population by taking the clues from the Indian insurance
industry whereby they have separate set of products for the urban as well as rural sector. The
products in the rural sector are simple and less in number? which are easy for them to
understand.

Measures needed to be implemented to develop

(a) Investors confidence

(b) Promote best practices amongst mutual funds, in the Indian Mutual Funds Industry.

Investor’s confidence can be developed by providing efficient investment management


processes, improving service standards and by launching innovative products.

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Research and Analysis of Indian Mutual Fund Industry

7. Conclusions

Success in investing requires taking a view of the future, and not reacting to the immediate
past. Mutual funds are the fastest growing segment of the financial services sector in India
offering a better opportunity for investors with lesser risk. The Indian Mutual Fund Industry
is all set to achieve greater heights.

An investor must measure his risk appetite, understand his own capacity for risk and choose
his funds accordingly. Invest in mutual funds and have a longer investment horizon stay
focused on the long-term goals, and enjoy life in the meantime, because that’s what all of us
are really investing for.

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Research and Analysis of Indian Mutual Fund Industry

8. References
Books:
Barua, Samir. K., Raghunathan, V., Verma, Jayanth. R., Portfolio Management, Tata
McGraw-Hill Publishing Company Limited

Goodman, Jordan. E., Everyone’s money book on Stocks, bonds & Mutual funds, Dearborn
Trade Publishing

Sadhak, H., MUTUAL FUNDS IN INDIA Marketing Strategies and Investment Practices, 2nd
Edition, Response Books

Turan, M.S., Bodla, B.S., Performance Appraisal of Mutual Funds, Excel Books

Websites
www.amfiindia.com
www.irdaindia.org
www.kotakmutual.com
www.mutualfundsindia.com
www.indiainfoline.com
www.sebi.gov.in
www.valueresearchindia.com
www.moneycontrol.com
www.sbimf.com
www.franklintempletonindia.com
www.hdfcfund.com
www.utimf.com
www.hsbc.co.in
www.birlasunlife.com
www.dspmlmutualfund.com

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Research and Analysis of Indian Mutual Fund Industry

9. Annexure
Risk and Return of Equity Diversified Schemes

Risk and Return of Balanced Schemes

Schem e
72 SB I M ag
Research and Analysis of Indian Mutual Fund Industry

Risk and Return of ELSS Schemes

R is k A d ju s te d R e tu rn
S che m e A ve ra g e S h a rp e T re yn o r F a m a Je n se n
S B I M a g n u m T a x G a in S ch e m e0.248 93 20714 0.27181 757 0 .358 17638 0.067 0.104521 29
H D F C L o n g T e rm A d v a n ta g e F 0.237
u n d 88375 0.25551 084 0.32 0439 0.06 0.092513 41
H D F C T a x sa ve r - G ro w th 0.268 29725 0.22639 946 0 .266 23062 0.041 0.072345 05
P ru d e n tia l IC IC I T a x p la n - G ro w0.239
th 51002 0.21182 935 0 .267 01215 0.023 0.064239 26

Risk and Return of Short Term Debt Schemes

R is k A d ju s t e d R e t u r n
Schem e A v e r a g e F a m a S h a r p e T r e y n o r J e n s e nA v g R a nR ka n k
T a t a D y n a m ic B o n d F u n d 0-.0O2p6t5io5 n8- 20A9.0 0 8 9 1 3 08 .06 3 2 8 0 9 40 .3 1 3 7 7 70 .0 0 0 7 5 8 7 82 . 6 1
T a t a In c o m e F u n d 0 .0 3 7 6 7 4- 10 3.0 7 0 0 6 809.03 2 9 2 4 5 01 .37 1 4 2 2 3 03 .0 7 0 5 2 0 7 2 83 . 4 2
T a t a D y n a m ic B o n d F u n d 0 -.0O2 p6 t1io7 n6- 30B9.0 0 9 2 1 106.08 2 6 4 2 2 06 .24 6 3 0 6 6 07 .0 1 0043041 3 . 8 3
T a t a In c o m e P lu s F u n d - R IP 0 .0- 2( 4O 8p8tio
5- 60n7.0A1 )6 6 3 902.03 0 2 5 2 4 07 .09 2 5 4 9 2-60 1.0 0 1 4 5 8 9 35 . 2 4
T a t a S h o r t T e r m B o n d F0 u.0n2 d2 7 8 5- 0 1.0 0 6 6 6 4- 07 .03 7 2 7 7 1- 18 .0 4 7 5 9 1 2- 0 .06 0 2 1 9 9 0 75 . 6 5
T a t a In c o m e P lu s F u n d - H IP 0 .0- 2(O4 8p8t 0io- 0n2.0 B1 6) 6 4 003.05 0 2 4 6 2 09 .01 2 5 0 7 0 -204.0 0 1 4 5 0 55 . 8 6
P r u d e n t ia l IC IC I S T P 0 .0 2 1 9 1 6- 10 6.0 0 6 5 9 2- 09 .11 3 3 1 4 4- 2 .1 3 2 9 8 8 2- 06 .05 0 2 9 8 4 0 16 . 8 7
U T I G - S e c F u n d - S T P 0 .0 2 1 4 0 0- 05 .0 0 7 4 2 0- 09 .17 4 7 9 8 6- 15 .4 3 1 2 0 6 4- 05 .08 0 3 6 9 2 8 37 . 8 8
D S P M L G S e c F u n d - P la n0 .0B 2 -1 S1 4T4- 9D0 5.0 0 7 3 1 6-00 9.1 7 2 7 5 -566.6 0 9 8 5 2- 01 .03 0 3 6 1 2 7 78 . 8 9
U T I C h ild r e n s C a r e e r B o 0n.0d 2P0 la9 3n 5- 10 2.0 1 6 6 7 2- 06 .08 5 4 3 8 1- 03 .5 3 8 6 7 6 7 -408.0 0 4 9 2 1 9 . 2 10
D S P M L S h o r t T e r m F u0 n.0d2 0 9 9 0- 80 8.0 0 8 1 0 7- 04 .13 5 4 4 5 4 -023.2 1 0 8 6 -50 .0 0 3 9 7 9 39 . 4 11
T e m p le t o n G S F - T r e a s u0r .0y 2P 0la7 n1 5- 0 8.0 1 0 8 1 3- 03 .17 0 7 3 3 4- 17 .6 1 4 9 2 3 8-60 7.0 0 4 3 9 3 19 . 6 12

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