+ RESEARCH PROJECT ON

WORKING OF MUTUAL FUNDS

DARSHAN JAIN
B.COM [HONS.] THIRD YEAR
ST. ALOYSIUS COLLEGE [AUTONOMOUS]
ADMISSION NO:- 46855
MOBILE NO:- 6260538108

SUBMITTED TO:- DR. SURBHI JAIN

CHAPTER – 1
Abstract
Mutual funds allow for portfolio diversification and
relative risk aversion through collection of funds from
the households and investment of the same in the
stock and debt markets. Fixed- Income Funds in India
are a kind of mutual fund which makes investment in
debt securities that have been issued either by the
companies, banks, or government. Fixed- Income
Funds in India are also known as debt funds and
income funds.
Using various statistical measures the present study
aims to evaluating the performance of a few selected
income or debt mutual funds schemes of India on the
basis of their daily NAV. Popularity of income
schemes has only increased in the last decade. Income
mutual funds they have seen tremendous growth in
their number of schemes from 91 on 31st march 2001
to 330 on 31st march 2010. 506 in 2008 was the
maximum ever in terms of total schemes floating in
the market. This category has seen a decline only
twice in the last decade. First fall was posted in the
year 2003 and the second fall was reported in the year
2010. One striking fact which comes to light is the
huge percentage contribution of income schemes
towards the total AUM of the Indian mutual funds
industry.

1.Introduction
Mutual Funds:
A mutual fund is like a bridge or a financial
intermediary that allows a group of investors
to pool in their money together with a pre-
determined investment objective and then this
gathered money is invested by the fund
manager into specific securities (stocks or
bonds).
Mutual funds can be considered as one of the
best investment avenues because they are very
cost efficient and also easy to invest in. Thus
by pooling money together in a mutual fund,
investors can purchase stocks or bonds with
much lower trading costs than if they tried to
do it on their own.

Mutual Funds can be categorised according to

their nature as below:-
a) Equity funds:
Equity mutual funds invest pooled amount in
the stocks of public companies. Equity fund
managers apply different styles for stock
picking when they make investment
decisions for their portfolios. Some fund
managers use a value approach to stocks,
searching for stocks that are undervalued
when compared to other companies. Another
approach is to look primarily at growth,
trying to find stocks that are growing faster
than their competitors, or the market as a
whole. Some managers buy both kinds of
stocks, creating a portfolio of both growth
and value stocks.

b) Debt funds:
Debt mutual fund is a type of mutual fund
that is designed especially for the low risk
investor whose main aim is capital
appreciation coupled with decent returns on
investment. These are for investors who
prefer funds with lesser volatility and want a
regular income.
 Debt funds can give:
 Capital Appreciation

 Regular Income

c) Balanced funds:
As the name suggest, they are mixture of
both - equity and debt funds. They invest in
both equities and fixed income securities,
which are in line with pre-defined
investment objective of the scheme. Equity
part provides growth and the debt part
provides stability in returns.

These type of funds are meant to diversify away

a little of equity risk by exposure to debt, while
maintaining decent returns as well.

Some investors want just a single choice that offers

a decent chance at a good return on their money,
and that is more likely to avoid major volatility
when the economy slows down, even though this
means less upside when there is bull market. A
well-managed balanced fund has the best chance at
achieving that because when the stock market falls,
the bonds tend to hold their value better, and when
the stock market rises, bonds yields are typically
lower.
Parameters to choose Mutual Fund for investing:

A good track record is no guarantee for future

performance. Investor should also look at some
quantitative measures to evaluate which fund is
good for them.

a) Expense Ratio: Denotes the annual expenses

of the funds, including the management fee,
and administrative cost. Low expense ratio is
better.

Expense ratio is the percentage of total assets

that are spent to manage a mutual fund. As
returns from bond funds tend to be similar,
expenses become an important factor while
comparing bond funds.

SEBI has stipulated a limit that a fund can

charge. The largest component of the expense
ratio is management and advisory fees.
A lower expense ratio does not necessarily
mean that it is a better-managed fund. A good
fund is one that delivers good return with
minimal expenses.

b) Standard Deviation (SD): The total risk

(market risk, security-specific risk and
portfolio risk) of a mutual fund is measured
by ‘Standard Deviation’ (SD).

In mutual funds, the standard deviation

indicates how much the return is deviating
from the expected returns based on its
historical performance. In other words, it
evaluates the volatility of the fund.

The standard deviation of a fund measures

this risk by measuring the degree to which the
fund fluctuates in relation to its average return
of a fund over a period of time. A higher SD
number indicates that the net asset value
(NAV) of the mutual fund is more volatile
and, it is riskier than a fund with a lower SD.

c) Sharpe Ratio: An indicator of whether an

investment's return is due to good investing
 decisions or a result of excess risk. Higher
Sharpe Ratio is better.

Sharpe ratio (SR) is another important

measure that evaluates the return that a fund
has generated relative to the risk taken. This
ratio helps an investor to know whether it is
safe to invest in this fund by taking the
quantum of risk.

CHAPTER – 2
REVIEW OF THE LITERATURE

The study by SharadPanwar and Dr. R.

Madhumathi of Indian Institute of Technology,
Madras (2006) on “CHARACTERISTICS AND
PERFORMANCE EVALUATION OF
SELECTED MUTUAL FUNDS IN INDIA”,
identified differences in characteristics of
public-sector sponsored & private-sector
sponsored mutual funds and compare their
performance using traditional investment
measures. Net Asset Value (NAV) for the
medium-term period May,2002 to May,2005 of
selected mutual funds along with the index
value of the two benchmark market indices,
namely S &P CNX NIFTY and CRISIL
Balanced Fund Index were taken. They
primarily used Sharpe ratio, Jensen’s alpha,
excess standard deviation adjusted return
(eSDAR) and found out that private-sector
Indian sponsored mutual funds have
outperformed both Public-sector sponsored and
Private-sector foreign sponsored mutual funds.

The paper by Dr. Rao (2002) on

“PERFORMANCE EVALUATION OF
INDIAN MUTUAL FUNDS” evaluated the
performance of Indian Mutual Fund Schemes in
a bear market using relative performance index,
risk-return analysis, Treynor’s ratio, Sharpe’s
ratio, Jensen’s measure, Fama’s measure. The
study finds that Medium Term Debt Funds were
the best performing funds during the bear period
of September 98-April 2002 and 58 of 269 open
ended mutual funds provided better returns than
the overall market returns.

One more study by HewadWolasmal and

published by Econ WPA on “PERFORMANCE
EVALUATION OF MUTUAL FUNDS” looked
at some measures of composite performance
that combined risk and return levels into a single
value using Treynor’s ratio, Sharpe’s ratio,
Jenson’s measure. The study analyzed the
performance of 80 mutual funds and based on
their analysis, it was found that none of the
mutual funds were fully diversified. This
implied there is still some degree of
unsystematic risk that one cannot get rid of
through diversification.

Another paper by Mr. SoumyaGuha Deb, Prof.

Ashok Banerjee & Prof. B BChakrabarti (2007)
on “PERFORMANCE OF INDIAN EQUITY
MUTUAL FUNDS VIS-A VIS THEIR STYLE
BENCHMARKS: AN
EMPIRICAL EXPLORATION”, used Return
Based Style Analysis (RBSA) to evaluate equity
mutual funds in India using quadratic
optimization of an asset class factor model
proposed by William Sharpe and analysis of the
relative performance of the funds with respect
to their style benchmark.

One more paper by Juan Carlos(2005) on

“PORTFOLIO PERFORMANCE: FACTORS
OR BENCHMARKS?” analyzed whether it
was more appropriate to apply a factor-based or
a characteristic-based model - both known as
benchmarks in portfolio performance
measurement using the Linear model, asset
pricing model and Fama and French factors.
The study showed that if information on returns
was used and a linear model was proposed that
adjusted return to a set of exogenous variables,
then the right side of the equation reported the
achieved performance and the passive
benchmark that replicated the style or risk of
the assessed portfolio.

CHAPTER - 3

RESEARCH METHODOLOGY
Research methodology is a collective term for the
structured process of conducting research. There
are many different methodologies used in various
types of research and the term is usually
considered to include research design, data
gathering and data analysis.

Data selection is defined as the process of

determining the appropriate data type and source,
as well as suitable instruments to collect data. The
primary objective of data selection is the
determination of appropriate data type, source,
and instrument(s) that allow investigators to
adequately answer research questions.
To conduct this analysis, daily NAV of each
mutual fund scheme along with their benchmark
values, for the period of Oct, 2007 to Oct, 2012 is
considered.

Net asset value (NAV) represents a fund's per

share market value. This is the price at which
investors buy ("bid price") fund shares from a
fund company and sell them ("redemption price")
to a fund company.

To calculate a Mutual Fund's Net Asset Value or

NAV,
Mutual Fund NAV = Total Assets - Liabilities / Total
number of shares or units
The assets of a mutual fund would consist of its
investments and cash. The liabilities of a mutual
fund include operating expenses.
Statistical Tools:

Various statistical tools are used like Standard

Deviation, Beta, Sharpe ratio, R- Square are used.
All the calculations are done in excel sheet.
Performance Parameters:
i. Standard Deviation:
The total risk (market risk, security-specific
risk and portfolio risk) of a mutual fund is
measured by ‘Standard Deviation’ (SD).

ii. Sharpe Ratio:

Sharpe ratio (SR) is another important
measure that evaluates the return that a fund
has generated relative to the risk taken. Risk
here is measured by SD.
Formula to calculate Sharpe Ratio is:
𝑟ҧ� � ି𝑟೑
Sharp
e where,
Ratio
ൌ
 𝜎𝑝

rp = Mean
rate of return
on NAV of
MF rf = risk-
free rate of
return
ıp = standard deviation of MF

iii. Beta:
Beta is a measure of the volatility of a
particular fund in comparison to the market
as a whole, that is, the extent to which the
fund's return is impacted by market factors.
Beta is calculated using a statistical tool
called ‘regression analysis.’
Formula to calculate Beta is: 𝑇 ൌ 𝑎 ൅ 𝛽𝑥

iv. R-Square
So, while considering the beta of any fund,
an investor also needs to consider another
statistic concept called ‘R-squared’ that
measures the correlation between beta and
its benchmark index. The beta of a fund has
to be seen in conjunction with the R-squared
for better understanding the risk of the fund.
 DATA COLLECTION:-

Data Collection is an important aspect of any type of

research study. Inaccurate data collection can impact
the results of a study and ultimately lead to invalid
results.
Only secondary mode of data collection is involved.
Secondary information is collected from company
and other mutual fund websites. (e.g.
www.hdfcfund.com, www.aiginvestments.co.in,
www.bseindia.com/stockinfo/indices.aspx).

Sampling has been done on the basis of CRISIL

Ranking. That means, the company selected for this
study have top CRISIL ranks.

The data of the following mutual fund schemes are

collected:

Sr.
no. Equity Mutual Fund Debt Mutual Fund Scheme
Scheme
1 Fidelity Equity Fund IDFC Dynamic Bond - IP B (G)
(G)
2 UTI Opportunities Fund SBI Magnum Income Fund (G)
(G)
3 ICICI Pru Focused HDFC Short Term Opportunities
 BluechipEqty (G) (G)
4 Birla Sun Life MNC IDFC G Sec Fund - Investment
Fund (G) Plan - Plan B
5 HDFC MidCap Kotak Gilt – Investment
Opportunities (G)
6 SBI Magnum Emerging Birla Sun Life Ultra Short Term
Busi (G) Fund
HDFC Cash Management Fund -
7 Mirae (I) Opportunities- Treasury
RP (G) Advantage Plan
8 Quantum Long-Term ICICI Prudential Flexible Income
Equity (G) Plan
9 Can RobecoEqty JM Money Manager Fund Plan
TaxSaver (G)
10 Franklin India Tax UTI Treasury Advantage Fund
Shield (G)

Analysis of data:

Analysis of data is a process of inspecting, cleaning,

transforming, and modelling data with the goal of
highlighting useful information, suggesting
conclusions, and supporting decision making. Data
analysis has multiple facets and approaches,
encompassing diverse techniques under a variety of
names, in different business, science, and social
science domains.

Data collected has been analysed and presented in the

form of tables and figures in next chapter i.e. Data
Analysis.
3.3 OBJECTIVES OF THE STUDY
The objectives of this study are:
 To study the performance of top 10 equity mutual fund

schemes in various categories

 To study the best mutual fund house in Equity Mutual

Fund category
 To compare the performance of top 10 equity

mutual fund schemes according to the performance

parameters.

I. Data And Methodology

The period of study is 1997- 2012. A total of 45 equity based
mutual fund schemes have been considered. Out of 45, 20
belong to the public sector companies namely LIC and UTI,
while the rest belong to the private sector, HDFC and ICICI.
For calculation of the risk, the study has used the daily closing
Net Asset Values (NAV) of the mutual funds along with daily
closing price of the benchmark stock index -NIFTY and
SENSEX. The main idea of the study is to calculate the
expected return from a scheme (which is commensurate with
the risk), and then comparing it with its actual rate of
return over the given time period. To find how risky a
scheme is, we calculate its risk coefficient beta, as defined in
the CAPM. We define the following terms for this:
Ri : Daily growth rate of Mutual Fund
NAV  NAV …(1)
R  i i1
 i
NAV
i1

where NAVi denotes the net asset value of a scheme at time i.

Ri : Mean daily growth rate of a scheme.
n

n
Ri
R 

i …(2)
i1
Similarly for market index, which is
either NIFTY or SENSEX, we define:
Rmi: Daily Growth rate of the Market
index

I  Ii1
R  i
mi Ii …(3)

Rm : Mean daily growth rate of 1
the market index
n R
mi

…(4)
Rm  
n
i1
Where Rmi is the growth rate of the market index and n is the
number of days for which it has been studied.

4.1 Risk free Rate of Return (Rf)

In this study, Rf is taken as the fixed deposit rate in the
nationalized banks.
From the Capital Asset Pricing Model, the beta of an asset,
which measures the risk of an asset, is calculated by formula:
 Cov(Ri , Rm ) [(Ri  Ri )(Rmi 
  m,i  
Rm )]

2

m [(  R )2 …(5)
Rmi m]
Var(Rm )
4.2 Expected Rate of Return (E[Ri])
After calculating the risk parameter (beta) of an asset,
and the annual growth rate of the market index, we calculate
the expected rate of return of the mutual fund scheme. The
formula is derived from the CAPM :
E[Ri] = Rf + β( E[Rm]- Rf ) …(6)
I. Emperical Findings

Table 1: Performance of schemes on the basis of their

Risk-Return Parameters
Returns
Using equation (5) we calculate the beta value of a scheme
which is listed in the third column of the table. A beta value of
greater than 1 implies that the asset is more risky than
market, and vice-versa. The period of study need not be same
for all the mutual fund schemes, because the date of inception
for all of them is different. So the fourth column depicts the
annual rate of growth of market index, which is either
SENSEX or NIFTY, for the aforesaid period. Now, using the
formula in equation (6), we calculate the expected rate of
return for the particular mutual fund scheme which is
commensurate with its risk.The next column depicts the actual
rate of return for the asset. Now the difference between the
expected and actual rate of returns would lead us to the
conclusion. If the difference is positive i.e. if the actual rate of
return is greater than the expected return, the asset lies above
the Security market line and vice-versa. Consequently, we say
that the mutual fund scheme has over performed, and vice-
versa.
However if the aforesaid difference is within the range
of 2%, it implies that the scheme is very close to the security
market line and classified as averagely performed.
Table 2: Comparison between Public and private
sector companies.
Comp Sche Over- Under- Aver
any mes performe performed age
d
Priv HDF 9 6 0 3
ate C
ICICI 16 11 4 1
Publ LIC 9 0 9 0
ic UTI 11 4 2 5
 Out of 45 mutual fund schemes analyzed, 25 belong to
the private sector companies, while 20 belong to the public
sector companies. The percentage of schemes which have
over-performed is 67%, 69%, 36% and 0, for HDFC, ICICI,
UTI and LIC respectively. In other words, 68% of the private
sector schemes, and 20% of the public sector schemes have
over-performed.
From a different perspective 16% of the private schemes and
55% of the public sector schemes have under- performed.
5.1 Systematic Risk (Beta)
In the Capital Asset Pricing Model, the risk of any asset is
measured by calculating its beta (β). It measures
howriskyanassetis,withrespecttothemarket.If beta of a scheme
is greater than unity it implies that it’s riskier than
themarketindexandvice-versa.In this analysis of 45 schemes,
there’s just one scheme whose beta is greater one, which is
Banking Sector fund of UTI. Despite its high risk factor, it has
over performed by a huge margin of 9%.Intherangofbeta(.8-
1.0),therearetotal21mutualfundschemesoutof45.
This shows that nearly half of them are almost
as risky as the Stock market. Among these 21
schemes, the contribution of HDFC, ICICI, LIC, and UTI are
3,5,8 and 5 respectively. In terms of individual percentage,
these are 33%, 31%, 89% and 45% respectively.
 Hypothesis 1: There is no association between the
variables of investment objective (Tax benefit) and
Investors’
Attitude (Gambling Attitude, Rational Attitude &
Cautious Attitude).
Hypothesis 2: There is no association between the
variables of investment objective (Returns) and
Investors’
Attitude (Gambling Attitude, Rational Attitude &
Cautious Attitude).
Hypothesis 3: There is no association between the
variables of investment objective (Professional
management)
and Investors’ Attitude (Gambling Attitude, Rational
Attitude & Cautious Attitude).
Hypothesis 4: There is no association between the
variables of investment objective (Diversification) and
Investors’ Attitude (Gambling Attitude, Rational
Attitude & Cautious Attitude).

Hypothesis 5: There is no association between the

variables of investment objective (Convenience) and
Investors’ Attitude (Gambling Attitude, Rational
Attitude & Cautious Attitude).
Hypothesis 6: There is no association between the
variables of investment objective (Flexibility) and
Investors’
Attitude (Gambling Attitude, Rational Attitude &
Cautious Attitude).

LIMITATIONS OF THE STUDY

The Mutual Fund Industry in India has emerged over the
years. In the current era of uncertainty and volatility in
the market the investors hesitates to invest their money
in Mutual Fund Schemes as they perceive capital market
as risky. So, in the present conditions the role of
financial brokers and agents is becoming very much
important as they provide the suitable products to the
investors as per their needs. It is the duty of broker or
agent to encourage the investor to purchase mutual fund
products and help achieve his financial goals over a
period of time. The right fund selection is a dilemma in
today’s investment age. The investors will be able to
choose the correct investment compatible to their
objectives only when they are guides and educated
towards the plethora of funds available and their
advantages and risk associated with them.

CHAPTER – 4 :
How mutual funds work

A mutual fund allows investors to pools money with a

common investment objective. It then invests the money in
various asset classes based on the scheme’s objectives.
As an investor, you put your money in financial assets like
stock, bonds and other securities. You can either buy them
directly or use investment instruments like mutual funds.
Mutual funds have certain advantages over direct investments.
For example, maybe you lack the skill to understand market
trends yourself, or do not have the time to follow the market
closely. Mutual funds are a great alternative in this case as
they are managed by professionals. But how do mutual funds
work? Here is a handy guide to what you should know.

MUTUAL FUND AS AN INVESTMENT OPTION

A mutual fund is an investment vehicle that pools money from
investors with a common investment objective. It then invests
the money in various asset classes like equities and bonds
based on the scheme’s objectives. An asset management
company (AMC) makes these investments on behalf of the
investors. The team that manages a mutual fund picks the
stocks which investors’ money will be put into based on
clearly defined investment objectives.
MUTUAL FUND INVESTMENT VIA SIP
A systematic investment plan (SIP) for mutual funds makes it
easy to invest in a disciplined way. The SIP option is similar to
opening a recurring deposit (RD) with a bank. Like in the RD,
your SIP will deduct a fixed amount from your bank at
specified intervals—usually every month.
there is a key difference. The RD pays a fixed interest on your
investment. The returns from your mutual fund SIP, however,
depend on the net asset value (NAV) of the mutual fund
scheme. The NAV represents the current market value of the
underlying securities, and it fluctuates daily.
A mutual fund SIP brings certain advantages to the investor:
• There is no need to worry about making lump-sum
payments. You can invest small, manageable amounts
every month.
• The regular and systematic approach builds discipline
among investors. Once you place a standing instruction
for auto-debit, the SIP investment will take place
automatically.
• Since the NAV fluctuates, your investment buys a
different number of units with each instalment. This has
the potential to lower the average cost of investment over
time, thus maximising your returns.
FACTORS AFFECTING MUTUAL FUNDS
You need to be aware of several factors and terms when investing
in a mutual fund:
• NET ASSET VALUE:
The overall cost of a mutual fund depends on the price per fund
unit, which is known as the net asset value (NAV). The NAV
helps you understand how a specific mutual fund scheme is
performing. Mutual funds invest in the securities market. The
market value of securities changes every day. So, the NAV of a
scheme also changes every day.
• ASSETS UNDER MANAGEMENT:
Mutual funds buy assets using the money they collect from
Investors. These assets include stocks, bonds, and other
securities. The total value of all the assets that a mutual fund
buys is called assets under management (AUM).
• FUND MANAGERS:
These are experts with real-time access to crucial market
information. Fund managers execute trades on the largest and
most cost-effective scale. These managers are full-time, high-
level investment professionals. They monitor the companies in
which the mutual funds they manage have invested.
• INVESTMENT OBJECTIVE:
Investors invest in financial instruments to achieve a particular
objective. This could be to increase wealth, accumulate money,
or simply to protect money from inflation. Similarly, every
mutual fund has a goal which it aims to achieve on behalf of
investors. This goal or investment objective of the mutual fund
could be capital appreciation—profits—in the long term, or
distributing regular fixed income as dividends.
HOW YOU GAIN FROM INVESTING IN MUTUAL
FUNDS
Mutual funds help you achieve your financial goals in a number of
ways:
• POWER OF COMPOUNDING:
Mutual funds harness the power of compounding. Compounding is
the interest that you earn on interest. Hence, the value of your
investment keeps growing at an ever-increasing rate. Over time,
compounding can lead to a significant increase in the value of your
investment.
• DIVERSIFICATION:
Diversification is a key benefit of investing in a mutual fund. It is
the practice of investing in different types of securities or asset
classes. Not every asset moves in tandem; while some rise, others
fall. So, when you own both the stocks in your portfolio, any losses
from one are cancelled out by the gains in the other. Thus,
diversification reduces your overall risk.
• CAPITAL GAINS DISTRIBUTIONS:
Mutual funds distribute the profits made from selling some of their
underlying assets at higher values. This is called capital gains
distribution. You can use this to buy more mutual fund units
(reinvestment).
• AUTOMATIC REINVESTMENT:
A mutual fund gives returns in two ways—dividends and an
increase in value. An increase in value can be utilised only when
you sell the mutual fund units. Dividends, on the other hand, are
accessible as soon as they are distributed. You can use the dividend
amount to buy more units of the mutual fund scheme
automatically. Mutual fund dividends are tax-free for investors.
However, mutual funds are taxed for distributing dividends. This is
mainly applicable to debt mutual funds, not equity funds.
 • FUND SWITCH/MUTUAL FUNDS EXCHANGE
PRIVILEGE:
Many fund houses group a set of mutual funds together based on
their investment objectives or other factors like management. You
have the option to transfer your investment within a family of
funds from one scheme to another. This is called a fund switch or
exchange privilege.
• TRANSPARENCY:
It is important that your money is in safe hands. SEBI regulations
have made the mutual funds industry quite transparent. This allows
you to track your mutual fund investments at all times. AMCs are
mandated to deliver regular updates to investors on how the funds
are faring.
• VARIETY:
They say not to put all your eggs in one basket. This is true for
investing as well. Mutual fund schemes invest in a whole range of
industries and sectors, different asset types, and more. The schemes
may focus on blue-chip stocks, technology stocks, bonds, or a mix
of stocks and bonds, for example. Expect to be spoilt for choice.
• LIQUIDITY:
Open-ended mutual funds allow investors to redeem their units at
any time at the prevailing NAV. So mutual funds are highly liquid,
which is beneficial for investors.

Net Asset Value

This is perhaps the most important term to know with respect to
mutual funds. Net Asset Value (NAV) is important to understand
the performance of a particular scheme of a mutual fund. As an
investor, when you put in invest in a mutual fund, you will be
issued units. You will then become a unit-holder. This is akin to a
shareholding buying stocks.
Mutual funds invest the money collected from the investors in the
securities markets. In simple words, Net Asset Value is the market
value of all the securities held by the scheme. It is measured on a
per-unit basis. Since market value of securities changes every day,
NAV of a scheme also varies on day-to-day basis.
NAV is calculated by dividing the total net assets by the total
number of units issued. Total net assets is the market value of all
the assets a mutual fund holds, less any liabilities, as of a certain
date.
For example, if the market value of securities of a mutual fund
scheme is Rs 200 crore and it has issued 10 crore units to investors,
then the fund’s NAV per unit is Rs 20. NAV is required to be
disclosed by mutual funds on a regular basis – either daily or
weekly depending on the type of scheme.

Assets Under Management (AUM):

A mutual fund pools money from investors and uses this money to
buy assets like stocks, bonds and other securities. The total value
of the assets a fund buys is called the assets under management
(AUM).
AUTOMATIC REINVESTMENT:
A mutual fund gives return in two ways – dividends and an
increase in value. The latter can be utilized only when you sell the
mutual fund unit.
The dividends, however, are accessible as soon as they are
distributed. As an investor you can use this in two ways –
reinvestment or payout. When you choose the payout option, the
dividend amount will get credited in your bank account. In case of
reinvestment, the dividend amount will be utilized to buy more MF
units of the scheme.
The automatic reinvestment option is a service the fund house
provides to shareholders, giving them option to purchase additional
shares using dividends automatically.
CAPITAL GAINS DISTRIBUTIONS:
Apart from dividends, mutual funds also distribute the profits it
makes from selling some of the underlying assets at higher values.
This is called capital gains distribution. This can also be used to
buy more MF units (reinvestment).

COMPOUNDING
When you invest in a financial asset, you earn on the amount
invested. Over time, you can either reinvest this amount or put it in
a bank account. Either way, you earn some amount on your
existing profits – either through investment returns or from bank
interest. Thus, your total returns over time increase. This is called
compounding. Over time, compounding can produce significant
growth in the value of an investment.

PORTFOLIO
This is the collection of assets owned by the mutual fund or even
you as an individual. It includes all the financial instruments
invested in like stocks, bonds, and other securities.
In a mutual fund, an expert handles all these assets. He or she also
decides which assets to buy and sell. This specialist is called the
Portfolio Manager. The frequency of the trading activity – how
often assets are bought and sold – in the fund’s portfolio is called
the Portfolio Turnover.

TOTAL RETURN:
This is the total amount of profits an investor makes keeping in
mind the dividends, capital gains from selling units, distribution of
fund income as well as returns earned on reinvestments. The total
amount paid to funds in the form of fees or commissions should be
deducted to get the total return. It can be used to measure a fund’s
performance. It is often written as a percentage of the total initial
investment.
Yield is also used by analysts to measure the income earned by the
underlying assets in a fund’s portfolio. It is calculated by
subtracting the fund’s expenses from the income earned by the
assets through dividend payments and capital gains, and then
dividing by the total price per share. The yield is usually expressed
as a percentage.

EXCHANGE-TRADED FUND (ETF):

An exchange-traded fund is an investment vehicle much like a
mutual fund, but which is traded on stock exchanges. It generally
tracks an index, a basket of assets or a commodity. The value of
the fund keeps fluctuating like a share due to demand-supply
forces.
Since most ETFs track a certain benchmark asset, it does not need
active portfolio management services. For this reason, its charges
are usually lower.

REDEEM:
There are two ways to exit a mutual fund – sell it to another
investor or back to the fund. The latter is called ‘redeeming’. Once
an investor redeems his or her lot of MF units, the NAV of the
fund changes. This is because the total number of units issued to
investors differs.
Many mutual funds charge investors for exiting within certain
period of time. This charge is deducted from the Net Asset Value
(NAV) and the remaining is paid to the investor. This price is
called the redemption price.
TYPES OF MUTUAL FUNDS:-
Debt Funds

Debt funds are funds that invests in debt instruments like bonds,
government securities, and debentures. It provides returns on your
investment at a fixed interest rate over a fixed period of time.
Simply put, a mutual fund is a pool of money. Investors put their
money in the fund and the fund house invests this in stocks and
bonds. These may be stocks and bonds of private companies or
those issued by the government. When these companies or the
government make a profit, the fund generates profits in return. The
money it makes is distributed to the investors. Mutual funds may
be categorised based on what they invest in. The three common
categories are equity funds, debt funds, and hybrid funds.
How does a debt fund work?
Debt funds are funds that lend money to companies, banks, or the
government. In other words, these funds invest in stocks, bonds,
and debentures, which act as a borrowing mechanism for
companies, banks, or the government. They take money from the
market and invest it in infrastructure or growth of the business.
The money from the fund is invested to reap bigger profits. The
investors get their money back over a period of time. They also
earn interest on the amount they invest. Both the rate of interest
and the maturity period are fixed.
Here, the maturity period is the time at which the principal amount
is returned to the investor.
Basic features of a debt fund
Regular pay-out:
Usually, you get regular interest payments when you invest in a
debt fund. Many people prefer it for the regularity of income.
Low risk:
Debt funds pose low risk. The interest amount is fixed. The
principal you invest is returned to you at a fixed time as well.
Unless there is a huge upheaval in the market, debt funds are safe
investments.
Low return:
Low risk also means low returns. Debt funds are ideal for people
who value safety over high returns.
Flexible time period:
Debt funds may have long or short maturity periods. Accordingly,
they are divided into long-term and short-term debt funds.
Range of investments:
Debt funds may invest in one single type of debt instrument. Or,
they may choose to invest in several assets like securities or bonds.
This choice tells you about the risk involved. For instance, gilt
funds are debt funds that lend money to the government by buying
government securities. Since the government is unlikely to default,
these funds pose a low risk to the investor.

Equity Funds
An equity fund is a fund that puts the majority of your money in
shares or stocks. When 60% or more of a fund’s assets are invested
in equity, it is an equity fund. The rest of the assets can be put into
debt instruments. These are often termed as growth funds. Equity
funds have had a track record of delivering high returns. On an
average, they deliver between 10% and 12% returns, before taxes.
Types of equity fund
The categorisation of equity funds depends on various factors.
These include the fund house’s investment approach, the market
capitalisation of the company, or what a particular fund invests in.
Active and passive funds:
These categories refer to the investment approach. A fund manager
may follow his own investment strategy. He may do this after
studying the market performance and the company’s background.
This is an active fund. When your investment portfolio reflects a
market index like Sensex, it is a passive fund. Such funds that
follow one index are also termed as index funds.
Large-cap, mid-cap, small-cap, and micro-cap funds:
This refers to market capitalisation. Market capitalisation is the
value the capital market places on a company’s equities. So, large-
cap equities are usually of well-established companies. Such funds
tend to be stable. Mid-cap and small-cap funds invest in smaller
companies. But such companies may not have found a stable
footing. So, the returns may be irregular. Some equity funds invest
across large-cap, mid-cap, and small-cap stocks. These are called
multi-cap funds.
Diversified and sectoral funds:
This would tell you what the fund invests in. Diversified funds
invest in a range of companies across industries. But sectoral funds
invest only in one predetermined sector. There is a third category
too—thematic funds. These funds invest according to a set theme.
For example, a particular thematic fund might invest only in
technology start-ups.
Hedge Fund
A hedge fund is an investment vehicle that pools capital from high-
net-worth investors and invests in a wide variety of assets. Hedge
funds have complex portfolio-construction and risk-management
techniques.
While reading about mutual funds, you might have come across the
term ‘hedge fund’. At times people think that hedge funds are a
type of mutual fund. But that is a mistake. Mutual funds and hedge
funds both pool money from investors, which they invest on their
behalf in different securities.
A hedge fund is an alternative form of investment open to high-
net-worth individuals and families or institutions. It may be in the
form of an offshore investment corporation or a private investment
partnership. It collects money from investors and invests it in
different types of securities. Hedge funds are managed more
aggressively and use sophisticated and risky investment strategies.
Characteristics Of Hedge Funds
Limited investor type:
In this case, ‘limited’ means that it is limited to investors who are
high-net-worth families and individuals, pension funds,
endowment funds, banks, and insurance companies. Hedge fund
investors are ‘accredited investors’. They meet certain stipulations
for investing in securities that are not open to the general public. In
India, you require a minimum investment amount of Rs 1 crore to
invest in a hedge fund.
Not regulated:
Securities market regulators such as the Securities Exchange Board
of India (SEBI) do not regulate hedge funds. Hedge funds do not
have to give reports, such as a periodic disclosure of net asset
values (NAVs).
Wide investment type:
Hedge funds invest in traditional stocks and bonds. They also
invest in derivatives, real estate, currencies, mortgage products,
and more. Hedge funds use both long-term and short-term
investment strategies.
Use of leverage:
Leverage is an investment technique whereby hedge funds use
borrowed capital to amplify returns. But leverage is a risky
practice. It could significantly increase the returns or even wipe out
a hedge fund.
Less liquidity:
It is more difficult to sell hedge fund shares. Mutual funds have a
per-share price that is calculated every day. This price is the net
asset value (NAV). You can use the NAV as a guide to sell your
shares at any time. Hedge funds, in contrast, attempt to generate
returns over a certain timeframe called the lock-in period, which is
at least a year. During this time, investors cannot sell their shares.
Moreover, investors can make withdrawals only at certain
intervals. These intervals may be quarterly or bi-annual.
Fee structure:
Hedge funds have a fee structure known as ‘two and twenty’. This
is because they charge a 2% asset management fee and a 20% cut
of any profits. The asset management fee may range from 1% to
4% of the funds’ NAV. At times, hedge fund managers invest
aggressively to achieve higher returns. This leads to increased risk
for the investors.
Global macros strategy:
Hedge funds use long-short positions in large financial markets.
This is also known as the global macros strategy. The fund
manager aims to reduce market risks by investing in convertible
bonds, arbitrage funds, long/short funds, and fixed-income
products.
What Is Hybrid Fund?
A hybrid fund is a type of mutual fund that invests in debt, equity,
and other asset classes. Such funds ensure capital protection to
some extent and bring modest returns.
A common question crops up when you start investing in mutual
funds: Should you invest in debt or equity?
You know that equity exposure brings higher returns but also
carries a greater risk of loss. Meanwhile, debt funds protect your
investment, but they limit your returns potential. This puts you in a
dilemma. Is there no middle path?
Hybrid funds are the answer as they invest in both equity and debt
instruments. As a result, they are less risky than equity funds, but
more so than debt funds.
The mixed exposure has an impact on the returns they bring as
well. As an investor in hybrid funds, you are likely to get higher
returns than with debt funds. But, the returns may be lower than
with equity funds.
What Is Liquid Fund?
A liquid fund is a debt mutual fund scheme that carries minimal
risk. It is considered a safe investment option for the short term.
For example, say, you have recently sold off a plush property in
Navi Mumbai. Chances are that the money is idling in your bank
account. You are probably waiting for the bank deposit rates to go
up before you make a more meaningful investment. Wouldn’t it be
nice if you could find a place to park the funds in the meanwhile?
A liquid fund can help you achieve just that. It keeps your money
relatively safe, besides giving you higher returns compared to
savings bank accounts or even fixed deposits.

What do liquid funds do

Liquid funds invest in money market instruments on your behalf.
They work in the same way as other debt funds. The only
difference compared to other debt funds is that these investments
are short-term. The investments could be in bonds, treasury bills,
government securities, debentures, and so on. They are called debt
instruments because they are a kind of borrowing mechanism for
companies, banks, and the government. When the market prices of
these securities move up or down, the Net Asset Value (NAV) of
the liquid fund also changes.

How does Liquid Funds work?

Liquid funds follow the same principles as debt fund .
You give money to fund managers. Other investors also chip in.
The money is pooled and invested in debt instruments. The
company returns the money to you along with interest over a short
period of time.
Liquid funds invest in securities with a residual maturity of up to
91 days.
The schemes are the least volatile because of the short-term
maturities of the money market instruments. These schemes have
become popular with institutional investors and high-net-worth
individuals who have short-term surplus funds.

What Are Small Cap Mutual Funds?

Small-cap mutual funds are funds which invest in start-ups or firms
in the process of development that have a market capitalisation of
less than Rs 500 crore.
Chances are you have seen a few mutual fund advertisements on
TV. You may have even heard the terms 'small-cap funds', 'mid-
cap funds', and 'large-cap funds'. These mutual funds are
categorised by their market cap. Small-, mid-, or large-cap is not
the size of the mutual fund. Here ‘cap’ is indicative of the size of
the companies in which the mutual fund invests.
Small-cap mutual funds are funds that invest in companies with
smaller capitalisation. These companies have a market
capitalisation of less than Rs 500 crore.
Small-cap mutual funds are funds that invest in companies with
smaller capitalisation. These companies have a market
capitalisation of less than Rs 500 crore.
Characteristics of small cap mutual funds
They invest in small-cap companies. These include start-ups or
small-revenue companies that are in the early stages of
development.
The companies that small-cap mutual funds invest in have a high
potential for growth in the future.
Small-cap funds are volatile in nature. This is because small-cap
companies are not financially stable. They are also not as
established as larger firms.
Small-cap funds are risky. They can generate fantastic returns for
investors looking for aggressive growth and who possess high risk-
taking capacities.
Small-cap funds outperform mid- and large-cap mutual funds
during a bull market. A bull market is when share prices rise,
which encourages buying.
The performance of small-cap funds decreases much more than
mid- and large-cap funds during a bear market. A bear market is
when share prices drop, which encourages selling.

What is a large-cap mutual fund?

A large-cap mutual fund is a category of funds that invests majorly
in companies with large market capitalisation.
If you are thinking about investing in mutual funds for the first
time, large-cap funds can be a very good option. These funds have
proved to be excellent wealth creators in the long term. The ‘cap’
in large-cap funds refers to market capitalisation. Large-cap funds
have been both steady and sustainable in terms of generating
returns and have endeared themselves to investors.
What do large-cap mutual funds do
Large-cap mutual funds invest 80% of their corpus in 100 of the
biggest companies listed in the stock markets in terms of market
capitalisation. There is no standard definition of what market
capitalisation a large cap scrip should have. But it is usually
perceived to be beyond Rs 10,000 crore. The top 50 of the NSE-
listed stocks are of that size. Large-cap funds are allowed to invest
the rest in mid- and small-caps to get an additional kicker in
returns. These funds typically invest in companies like L&T, ACC,
TCS, Reliance Industries, and so on.
Large-cap mutual funds are equity funds. Every mutual fund has a
certain predetermined investment objective that is drawn up based
on the fund's assets, regions of investment, and investment
strategies.
These are mutual funds that invest only in stocks. As a result, they
are usually considered high-risk, high-return funds. Most growth
funds—those that promise high returns over the long term—are
equity funds.
How large-cap funds differ from small-cap or mid-cap
funds
Mid-cap funds primarily invest in securities of companies that are
medium-sized. They have been mandated by the market regulator,
Securities and Exchange Board of India (SEBI), to invest at least
65% of their corpus in the securities of companies ranked between
101 and 251 in terms of market capitalisation. Such companies
take off during a bull phase in the market. This is because they
look for expansion whenever the opportunity presents itself.
Investing in these stocks can increase the chances of better returns
but they may disappoint during a bear phase of the market. Mid-
cap funds offer higher growth potential than large-cap funds but
are also considered riskier.
Small-cap funds, on the other hand, invest in securities of
companies which are small in terms of market capitalisation. They
offer the highest potential for growth. That is because they
typically invest in small companies that are aiming for quick
expansion and growth. This is also why, in the event of an
economic recession, these small-cap securities are subject to more
volatility than large- and mid-cap stocks. During a bull phase of the
markets, you can expect the small-cap stocks to fare better than
large-cap or mid-cap funds. Studies reveal that small-cap stocks
have historically outperformed large-cap stocks. However, a lot
depends on the broader economic climate which determines how a
particular stock will fare, be it large-, mid-, or small-cap. Investors
who have a much bigger risk appetite can invest in small-cap
funds.

An Overview of Indian Mutual Funds

Any type of mutual fund that exists in the U.S. is mirrored in some
way in the Indian market. There are mutual funds that invest in
equity or stocks and are managed to achieve a range of goals.
Some equity mutual funds are designed to generate long-
term capital gains through growth or value investing strategies,
like the Birla SL Frontline Equity Fund, while others are focused
on generating dividend income for shareholders. Some combine
the two, such as the popular ICICI Prudential Equity & Debt Fund.
Indian mutual funds may also invest in bonds and other debt
securities with the goal of generating regular interest income.
Indian debt funds invest in government or corporate debt
instruments and money market securities just like American funds.
There are also Indian balanced funds that invest in both equity and
debt instruments to create portfolios that offer a degree of stability
without completely ignoring the potential for big gains in the stock
market. A good example is the DSP Equity Opportunities Fund.
Just like in the American market, the Indian market offers mutual
funds that specialize in certain sectors, only invest in government
or inflation-protected debt, track a given index, or are designed to
maximize tax-efficiency.

Regulation
Mutual funds in India are regulated by the Securities and
Exchange Board of India (SEBI). Indian mutual funds are subject
to stringent requirements about who is eligible to start a fund, how
the fund is managed and administrated and how much capital a
fund must have on hand. To start a mutual fund, for example, the
fund sponsor must have been in the financial industry for at least
five years and have maintained positive net worth for the five
years immediately preceding registry.
The SEBI regulations include a minimum startup capital
requirement of Rs. 500 million for open-ended debt funds and Rs.
200 million for closed-ended funds. In addition, Indian mutual
funds are only allowed to borrow up to 20% of their value for a
term not to exceed six months to meet short-term liquidity
requirements.

CONCLUSIONS
In this paper we use monthly holdings data to examine some
accepted hypotheses about mutual fund behavior. Existing
empirical tests of these hypotheses have analyzed return data on
funds or have used holdings data observed at quarterly or semi-
annual intervals. The conclusions change when monthly holdings
data are used. There are two reasons for this. The first is that the
timing of events can be more precisely measured using more
frequent data. The second is that using quarterly or semi-annual
holdings data misses a significant proportion of trades – the very
trades that might well be initiated by the phenomenon under
investigation. In fact, we have shown that employing quarterly data
misses 18.5% of the trades found using monthly data, while
employing semi-annual data misses 34.2% of such trades.
Furthermore, the fact that the estimate of turnover based on
monthly holdings data is so close to that reported by Morningstar
means that few trades are missed with monthly data. The first
hypothesis we examine concerns momentum trading. Past studies
using quarterly data have found that funds on average follow a
momentum strategy, buying winners and selling losers. But these
studies suffer from the very problems described above, and when
fund actions are viewed on a monthly basis momentum disappears
and as many funds seem to buy past losers (contrarians) as buy past
winners (momentum buyers). The second hypothesis we examine
is tax selling. We find that funds increase their turnover in the
month preceding the calculation of taxes and that funds that have
realized capital Page 31 gains during the year increase their
realization of tax loss in the two months before taxes are computed.
Using losses to offset realized capital gains is in the best interests
of both managers and investors, and seems to take place. The third
hypothesis we examine is window dressing: do funds trade in the
period immediately preceding quarterly, semi-annual and annual
reports to show more attractive holdings? We find that funds trade
more in the months preceding the annual report, that they tend to
lower the illiquid securities in their portfolio in that month, and that
they tend to buy past winners and sell past losers. While we find
strong evidence of window dressing with respect to the annual
report, we find no such evidence for quarterly or semi-annual
reports. The final subject we examine is tournament models of
mutual fund behavior. The existing literature has used return data
to examine whether mutual funds that are doing well increase risk
in the second part of the reporting year. Theoretical results and
empirical results are mixed. Using monthly holdings data we
observe what funds are doing over time, yielding more precise
estimates of risk changes. We find evidence that high-return funds
increase risk and lowreturn funds decrease risk. The use of
monthly holdings data leads to new conclusions regarding well-
accepted beliefs. This paper presents important evidence on the
usefulness of monthly data and suggests that correct public policy
should encourage the availability of such data on a universal basis.
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So it can be said that with the structural liberalization policies no
doubt Indian economy is likely to return to a high grow path in few
years. Hence mutual fund organizations are needed to upgrade their
skills and technology. Success of mutual fund however would
bright depending upon the implementation of suggestions. With
regard to the Mutual Fund investor we are of the view that the
investor needs to adopt two crucial skills for successful investing
i.e. a sense of timing and investment discipline both need to be
adopted at the same time.