Investment Management

A Research Report on
Comparison between the Indian and US

Mutual Fund Industry
Nikita Rao
Heeshma Chhatralia
(Under the Guidance of Prof. Amit Gera)
BBM Sem I – December 2009
Alliance School of Management

Bangalore
Electronic
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ABSTRACT
Establishing realistic financial goals is the first essential step towards successful investing.
Understanding the kind of investment best suited to an individual to help one achieve his goal
is even more important. Financial Planning cultivates a positive attitude towards saving and
investment.
A mutual fund provides an option of investing without any major complexities. In order to understand
the logic behind the huge returns, which an investor gets, we need to understand the performance
parameters, which lead to these returns.
The main objective of the study is to evaluate the performance of mutual funds of USA and
India. And this evaluation can be done on the basis of parameters like NAV, AUM, Beta,
Standard deviation, Sharpe ratio, P/E Ratio, P/B Ratio, Portfolio Turnover, R-Squared,
Alpha and Expense Ratio. The research also intends to bring in the new trends in the mutual
fund industry and to give a futuristic insight to it.
The study is based on primary and descriptive research. As primary research is the true
representative of the investors’ opinion and it involves the collection of data that does not
already exist. Descriptive research provides insights into and comprehension of an issue or
situation with answers to questions such as who, what, where, when and how.
For analysis, four categories of funds have been used, which are Balanced funds, Large Cap
funds, Index funds and Tax funds of both the countries and these funds are compared. In each
type of category, five different schemes have been selected and then compared with each
other in order to know which country’s funds performance is better.
As a part of our primary research, a sample of 50 investors was taken each of US and India.
Questionnaire consisting of 12 questions pertaining to mutual funds were used to study the
performance of various schemes in both the countries.
This study gives only a brief idea as to how mutual funds in both the countries are
performing; an attempt has been made to represent mutual fund industry of both the countries
by taking a few top and best performing companies in each of the country.
Electronic
Electroniccopy
copyavailable
availableat:
at:https://ssrn.com/abstract=1535430
http://ssrn.com/abstract=1535430
Research analysis showed there has been an increase in the amount of business that mutual
funds are getting in India and it is quite significant. US mutual fund industry accounts to 51%
of the total worldwide share; due to its enormous size it is obvious that it is way ahead of
India. When it comes to growth rate, Indian mutual fund industry comes in one of the rapidly
growing industries. Many new foreign AMCs are now coming to Indian market.
Electronic copy available at: https://ssrn.com/abstract=1535430

Table of Contents
Contents Page
Abstract 2
Chapter I: Introduction 5
Chapter II: Literature Survey 17
Chapter III: Methodology 20
Chapter IV: Findings & Conclusion 29
Bibliography 61
Annexure 62

CHAPTER I
Introduction

Mutual Funds: An Introduction
Establishing realistic financial goals is essentially the first step towards successful investing.
Even more important is, understanding the kind of investment best suited to an individual to
help one achieve his goals. Financial Planning cultivates a positive attitude towards saving
and investment. The process identifying the financial needs and setting them up as a goal
changes the way people look at their investment. Proper saving no longer remains a residual
activity it becomes a priority.
A big question that puzzles every one, how much to spend and how much to save. Their goals
give them idea about this. This gives direction and meaning to individual financial decisions.
The individual sees these decisions as a part of whole process of planning and is able to make
meaningful decisions. He understands the short term and long-term effect of his financial
decisions on his goals.
People often invest in various asset classes:
• To beat Inflation
• To fund future needs
• To meet contingencies
• To maintain same standard of living after retirement
Although, it is not possible for an individual investor to understand mutual fund institutions
and investing in such an environment, the process can become fairly time consuming. Mutual
funds (whose fund managers are paid to understand these issues and whose Asset

Management Company invests in research) provide an option of investing without getting
lost in the complexities.
Mutual funds evaluate past performance, look for stability, and although past performance is
no guarantee of future performance, it is a useful way to assess how well or badly a fund has
performed in comparison to its stated objectives and peer group. A good way to do this would
be to identify the five best performing funds over various periods, say 3 months, 6 months, 1
year, 2 years, and 3 years. Shortlist funds that appear in the top five, in each of these time
horizons as they would have thus demonstrated their ability to being not only good but also
consistent performers. Mutual funds returns, especially equity funds depend on the index of
particular countries. However, it is very difficult to analyse which country’s index is the best.
The mutual fund industry has been growing at the annual growth rate of 25% to 30% in terms
of Asset Under Management (AUM) in the last few years. Currently, the industry’s AUM is
more than Rs. 7.5 lakh crores as on January 2009 and there are more than 410000 schemes –
in equity and debt as well as ELSS, Gold ETF, Gilt, Funds of funds – available in the market.

Returns in percentage (%)
Rank
1 2 3 4 5 6 7 8 9
Year
FTSE
DAX Bovespa S&P 500 Sensex H&S Nikkei Jak comp Kospi
1997 100
47.11 44.84 31.08 18.60 -20.29 -21.19 -36.98 -42.21
24.69
FTSE
Kospi S&P 500 DAX Jak comp H&S Nikkei Sensex Bovespa
1998 100
49.47 26.67 17.71 -0.91 -6.29 -9.28 -16.50 -33.46
14.55
FTSE
Bovespa Kospi Jak comp H&S Sensex Nikkei DAX S&P 500
1999 100
151.93 82.78 70.06 68.80 63.83 36.79 2.10 19.53
17.81
FTSE Jak
DAX S&P 500 Bovespa H&S Sensex Nikkei Kospi
2000 100 comp
-7.54 -10.14 -10.72 -11.00 -20.65 -27.19 -50.92
-10.21 -38.50
FTSE
Kospi Jak comp Bovespa S&P 500 Sensex DAX Nikkei H&S
2001 100
37.47 -5.83 -11.02 -13.04 -17.87 -19.79 -23.52 -24.50
-16.15
FTSE
Jak comp Sensex Kospi Bovespa H&S Nikkei S&P 500 DAX
2002 100
8.39 3.52 -9.54 -17.01 -18.21 -18.63 -23.37 -43.94
-24.48
FTSE
Bovespa Sensex Jak comp DAX H&S Kospi S&P 500 Nikkei
2003 100
97.33 3.52 62.82 37.08 34.92 29.19 26.38 24.45
13.61
FTSE
Jak comp Bovespa H&S Sensex Kospi S&P 500 Nikkei DAX
2004 100
44.56 17.81 13.15 13.08 10.51 8.99 7.61 7.34
7.54
FTSE
Kospi Sensex Nikkei Bovespa DAX Jak comp H&S S&P 500
2005 100
53.96 42,33 40.24 27.71 27.07 16.24 4.54 3.00
16.71
FTSE
Jak comp Sensex H&S S&P 500 Bovespa DAX Nikkei Kospi
2006 100
55.29 46.70 34.20 33.99 32.93 21.98 6.92 3.99
10.71
FSTE
Jak comp H&S Bovespa Sensex DAX S&P 500 Kospi Nikkei
2007 100
38.39 25.28 20.69 15.89 15.86 9.73 6.84 1.34
5.82
FSTE
Jak comp Bovespa Sensex Kospi H&S DAX S&P 500 Nikkei
2008 100
33.67 33.10 19.68 17.31 15.39 -5.52 -6.91 -27.55
-9.61
FSTE
Kospi Bovespa Nikkei DAX Sensex S&P 500 H&S Jak comp
2009 100
-29.21 -32.87 -35.26 -37.49 -37.94 -39.68 -40.58 -41.40
-31.15
Source – Mutual Fund Insight, Vol. IV No. 1215, August-September 2007; Yahoo Finance
S&P 500 – USA Bovespa – Brazil FTSE100 – UK DAX – Germany

Sensex – India Nikkei – Japan Kospi – South Korea
Jak Comp (Jakarta Composition) – Indonesia H&S – Hong Kong (Hang Seng)

Above table shows the annual returns of Key indices of some of the emerging as well as
developed economies in the descending order of performance over the last 10 years. Here it is
very difficult to identify a specific market that has consistently outperformed the rest, year
after year. So, one never knows which market is going to outperform the other.
For example - In one case, one country’s stock may outperform India’s but the next year it
may fall behind. It is very difficult to analyze the returns in this market. Therefore, there is lot
of uncertainty and this uncertainty has its effect on mutual funds’ performance. All these
things depend on investment and saving pattern in an economy. Hence, it is very necessary to
invest and invest regularly.
Mutual Funds Globally

Worldwide Mutual Fund Assets
The increase in assets reported in U.S. dollars was boosted by weakening of the dollar. For
example, on a U.S. dollar–denominated basis, mutual fund assets in Europe increased 13.9
percent in the second quarter of 2009, compared with a 7.2 percent increase on a Euro-
denominated basis. Equity fund assets rose 22.3 percent to $7.2 trillion in assets at the end of
the second quarter of 2009. Balanced/mixed fund assets increased 16.5 percent and bond fund
assets grew 13.8 percent in the second quarter. Money market fund assets dropped 1.4
percent to $5.7 trillion in the second quarter.
Worldwide Mutual Fund Assets

(Trillions of US dollars, end of quarter)
Source – ICI Research and Statistics

Net sales of Mutual Funds Worldwide
(Billions of U.S. dollars)
2007 2008 2009

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
All funds 316 382 394 2 -211 95 47 81
Long Term 37 131 -92 73 -242 -349 -16 293
Equity 31 84 -132 29 -147 -121 -39 93
Bond -50 -30 13 14 -67 -157 59 165
Balanced / Mixed 23 42 -15 15 -23 -56 -22 35
Other 32 36 41 15 -5 -16 -15 *
Money Market 279 250 486 -70 31 444 63 -212
* Less than $0.5 billion
At the end of the second quarter of 2009, 36 percent of worldwide mutual fund assets were
held in equity funds. The asset share of bond funds was 19 percent and the asset share of
balanced/mixed funds was 10 percent. Money market fund assets represented 28 percent of
the worldwide total.
Percent of Worldwide Mutual Fund Assets by Region, 2009:Q2
By region, 55 percent of worldwide assets were in the Americas in the first quarter of 2009,
33 percent were in Europe, and 12 percent in Africa and the Asia and Pacific region.
10

Total Net Assets, 2004 – 2009: Q2
Billions of U.S. dollars, end of period
2004 2005 2006 2007 2008 2009

Q2 Q3 Q4 Q1 Q2
All reporting
16,165 17,771 21,823 26,151 24,649 21645 18,917 18,164 20,335
Countries
Equity 7,219 8,333 10,508 12,446 10,437 8,618 6,497 5,925 7,247
Bond 3,313 3,450 3,871 4,277 4,184 3,793 3,388 3,380 3,847
Money Market 3,323 3,364 3,864 4,961 5,591 5,424 5,786 5,799 5,719
Balanced/Mixed 1,445 1,566 2,049 2,632 2,476 2,159 1,773 1,668 1,944
Other 398 512 676 884 975 823 676 641 731
Countries
reporting in 15,279 16,772 20,391 24,090 22,732 20,001 17,462 17,927 20,090
every period
Equity 7,037 8,138 10,250 11,866 10,005 8,260 6,239 6,317 7,718
Bond 3,227 3,348 3,763 4,151 4,053 3,669 3,283 3,442 3,940
Money Market 3,268 3,304 3,791 4,841 5,461 5,291 5,635 5,868 5,782
Balanced/Mixed 1,365 1,486 1,929 2,371 2,263 1,977 1,636 1,628 1,885
Other 381 496 658 861 951 804 669 672 766
Above table shows the Total Net assets from 2004 to 2009 by type of funds. The table shows
that there is a significant amount of increase in total net assets. The total net assets under
equity increased from $US 7219 Billion in 2004 to $US 7247 Billion in year 2009. However,
the Balanced fund increased by around 34% over 2004. This shows that the mutual funds
industry overall is growing rapidly and having a significant impact on the economy.
Mutual Fund Industry in America
The combined assets of the America's mutual funds little changed in June, decreasing by
$1.60 billion to $9.6 trillion, according to the Investment Company Institute's official survey
of the mutual fund industry. Such a huge amount shows clearly that America is leader in
mutual funds and having a significant contribution in US economy.
11

U.S. HAD THE WORLD’S LARGEST MUTUAL FUND MARKET
Percentage of total net assets, year-end 2008
Source – www.icifactbook.org
This above diagram shows that the total share of America in mutual fund is half the total
worldwide mutual fund industry, which is more than $9.6 trillion out of total mutual fund
assets of $19.0trillion. In addition, this 51% share is mostly dominated by money market
funds, which constitute around 40% followed by domestic stock funds of 30%, followed by
international stock funds, bond funds and then hybrid funds. This shows the healthy mix of
all types of funds in US mutual fund industry.
Major factors affecting mutual fund industry worldwide
Population
Source – UN, CLSA Global Growth in Working- Age Population (15-64)
12

India’s population is young, with 54% under the age of 25 and 80% under 45 and the
percentage of working population is rising rapidly. The graphs below show that in
forthcoming years the dependency ratio will also decrease this means the dependency ratio is
low in India and then economy will have a sustained supply of labour going ahead.
What does this mean?
A younger and working age population means:
• Income levels to rise

• Higher savings and consequent flows into equity markets
• Increased household consumption
• Significant increase of labour supply
• Large Population and Favourable demographics
Movement in Global Markets
Source – Bloomberg
If we see the position of BSE Sensex as compared to other major indexes in the world then
we find that BSE has been the best performer.
This is the major factor, which has contributed to mutual fund emerging as a great investment
vehicle for every category of investors and made mutual fund one of the most preferable way
to generate return. Mutual fund invest in equity of various companies for long time and long
investment in equities can help investors in generating good returns. If we look at the graph
then we can say that equities have the potential to deliver good return if we invest for long
term.
13

Investor Dilemma – Risk & Return
BSE Sensex
CAGR: 21.10%
1600 0
1400 0
1200 0
1000 0
800 0
600 0
400 0
200 0
0
Jan-01 Jan-0 2 Jan-03 Ja n-04 Jan-05 Jan-06 Jan-07
Inflation affects the Return
Inflation has always been one of the most important macroeconomic factor affection the
country. It represents the general price level of the country. Inflation has always lowered the
actual return from bank savings except the year 2002.
• Returns on safe fixed income options such as bank deposits have been moderating
• Assured return products are being phased out
• Inflation and taxes are impacting returns
10.00 10.00 8.0
6.4 8.50 6.5

8.00 6.0 8.25*
5.2 7.00 6.0
6.25 4.8
6.00 4.3
5.50 6.25
4.0
4.00
1.8
2.0
2.00
0.00 0.0
2001 2002 2003 2004 2005 2006 2007
Bank Deposit Inflation
Source – RBI (Bank Deposit Rate); CitiGroup (Inflation)
14

Impact of Various Changes
With the increase in global trade and finance, there is need for level playing field as the WTO
has led down common rules to facilitate smooth trade among member countries irrespective
of their size. Fall out of globalization is the increase in volatility and vulnerability of markets.
This environment crisis also spreads quickly and there is a greater danger of contagion than
even before. In order to detect timely fault lines in the global financial markets and put in
place appropriate corrections, the adoption of international standards and global benchmark
becomes important. It is in the context, effective management of risks assumes critical
importance to all the constituents of the financial sector and Indian mutual funds industry is
not an exception.
Mutual funds have been a significant source of investment in both government and corporate
securities. It has been for decades the monopoly of the state with UTI being the key player,
with invested funds exceeding Rs. 300 bn. (US$ 10 bn.). The state-owned insurance
companies also hold a portfolio of stocks. Presently, numerous mutual funds exist, including
private and foreign companies. Banks (mainly state-owned) too have established Mutual
Funds (MFs). Foreign participation in mutual funds and asset management companies is
permitted on a case-by-case basis. The government in 1964 set up UTI, the largest mutual
fund in the country, to encourage small investors in the equity market. UTI has an extensive
marketing network of over 35,000 agents spread over the country. The UTI scripts have
performed relatively well in the market, as compared to the Sensex trend. However, the same
cannot be said of all mutual funds. Indian households seem uncomfortable with the concept
of market-related returns, which is clear from the table, which shows the composition of
financial savings among Indian household.
If we find saving on mutual fund then it will come around 2% which is very less as compared
to mutual fund investors in USA who save around 30% of their financial savings on mutual
fund. This is because of their less risk appetite nature. Indian mutual funds are however, seen
to be growing tremendously. This is only because some AMCs have done very well in the
market. Therefore, it is clear that if AMCs do well in the market then the mindset of Indian
investors could be change who think stock market investment very risky and who are still
saving around 47% of their financial savings on fixed deposit.
15

% to
AREA OF INVESTMENT Rs. (Cr) Financial
Savings
Deposits (Banks and others) 278985 47.4
Shares, Debentures and Mutual Funds 29008 4.9
Investments in Small Savings 72364 12.3
Insurance 83340 14.2
Others (Investments in Government Securities – 2.4%, Currency
124959 21.23
– 8.8%, Provision and Pension Funds – 10%)
Introduction to Equity Mutual Fund
Equity Funds are those that predominantly invest in equity shares of companies. There are
varieties of ways in which an equity portfolio can be created for investors. Equity is
considered best for long-term investment. Not only in India, but also in America, equities are
considered the best ones. Major part of mutual funds in invested in Equity funds. The
following figure will show how Equities have contributed in India. In this case, cumulative
annualized Returns from April 1979 to March 2007 have been taken and this figure shows
that over such a long period, Equities have given return of 14.30% when compared with
Corporate Fixed deposits, Bank FD, Gold. Here inflation has also been given. Inflation
reduced the purchasing power of an investor but here equities have given a return of 14.30%
that is almost double the inflation. As a result, the effect of inflation has been nullified.
Cumulative Annualised Returns

Source – RBI; BSE
16

CHAPTER II
Literature Survey
17

Prof. Amit Gera, 2007, Publication on research on “Indo-US mutual fund comparison”
A research report based on a comparison between top Indian and US mutual funds. The
report describes the benefits of mutual funds and the best options available in the current
market situation. The research is conducted through a comparison of various performance
measures including Expense Ratio, Portfolio Turnover, and most importantly Standard
Deviation, Sharpe ratio, Beta, R-squared, P/E Ratio, P/B Ratio and Alpha. The report also
analyses the future of mutual funds in both these countries and determines the best mutual
fund amongst both markets.
Madhumita Chakraborty, P K Jain and Vinay Kallianpur, South Asian Journal of

Management, Vol. 15, Issue No. 4, Oct-Dec 2008, “Mutual Fund Performance: An
evaluation of Select Growth Funds in India”
The report attempts to evaluate the performance of mutual funds based on rate of return as
well as risk-adjusted methods. Performance of mutual funds are compared with the risk-free
returns as well as the benchmark index (BSE 100), which is taken as a proxy for market
returns. The study provides some evidence of satisfactory performance in terms of returns
generated per unit of risk and a conclusive statement regarding the capabilities of mutual
fund managers still being elusive.
Dalal Street Investment Journal, Vol. XXIV No. 25, Dec 2009, “Time to go for Mutual
Funds”
The article describes the Indian stock market to likely extend its gains, and therefore a great
opportunity for an individual to invest in mutual funds. Markets are likely to rise from the
current 17,000 level to the 21,000 level in three to six months time. This means that investors
buying mutual funds now are likely to benefit in the near future. Equity mutual funds are
among the best performing asset classes. Mutual fund industry has an enormous market
potential in India. A guide on choosing the best mutual fund has been mentioned, outlining
the various important aspects one must keep in mind while selecting.
D N Rao, August 2006, “Investment Styles and Performance of Equity Mutual Funds in
India”
Suggests and explains various methods used to compare mutual funds in India. These include
Sharpe Ratio and Standard Deviation.
18

George O Aragon and Wayne E Ferson, 2008, Foundations and Trends in Finance, Vol.
2 No. 2, “Portfolio Performance Evaluation”
This paper provides a review of the methods for measuring portfolio performance and the
evidence on the performance of professionally managed investment portfolios.
Kotak and CNCC-TV18, “Everything you wanted to know about investing”
This aims to describe equity mutual funds and its various types. It gives meanings of various
terms important in mutual funds.
W F Sharpe, 1994, Journal of Portfolio Management, “The Sharpe Ratio”
This article illustrates the working of Sharpe Ratio along with the standard deviation.
W F Sharpe, 1966, Journal of Business, “Mutual Fund Performance”
Daryl Chia Rui Ming, July 2008, “Investment management”
19

CHAPTER III
Methodology
20

This gives an insight of the steps that are generally adopted by a researcher in studying his
research problem along with the logic behind them.
Objective of the Study
• To evaluate the performance of mutual funds of USA and India and to see if the
growth rate of Indian mutual fund industry is higher than the American industry
• Evaluate and compare the funds using NAV, AUM, Beta, Standard deviation, Sharpe
ratio, P/E Ratio, P/B Ratio, Portfolio Turnover, R-Squared, and Expense Ratio
• Provide conclusions as to where Indian funds stand vis-à-vis its American Funds
• The project also intends to bring in the new trends in the mutual fund industry and to
give a futuristic insight to it
• It also aims to enlighten the readers about the scams and Scandals which disturbed the
mutual fund market in US
• It will also bring out the potential growth opportunities that are there in the industry
both domestic as well as abroad
Evaluation Parameters
Following are the evaluation parameters based on which the analysis and comparison of
various equity schemes is done.
Net asset value (NAV)
The value of a collective investment fund based on the market price of securities held in its
portfolio. NAV per share is calculated by dividing net assets of the scheme /number of Units
outstanding. It is the price per share or exchange-traded funds (ETFs). The higher the value
of NAV better is the performance. The reason is the trust the fund enjoys over a period.
Mutual funds pay out virtually all of their income and capital gains. As a result, changes in
NAV are not the best gauge of mutual fund performance, which is best measured by annual
total return.
21

Expense Ratio
A measure of what it costs an investment company to operate a mutual fund. An expense

ratio is determined through an annual calculation, where a fund's operating expenses are
divided by the average dollar value of its assets under management. Operating expenses are
taken out of a fund's assets and this lowers the return to a fund's investors.
The lower the expense ratio the better is the performance of the mutual fund. This means that
the fund is spending fewer amounts on day-to-day expenses and eliminating unnecessary
burden on investors.
Assets under Management
This is the market value of assets managed by an investment company on behalf of its
investors. Asset under management (AUM) is looked at as a measure of success against the
competition. It consists of growth/decline due to both capital appreciation/losses and new
money inflow/outflow.
A higher AUM portrays that the fund is better compared to one having a lower AUM.
Beta
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in

comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM),
a model that calculates the expected return of an asset based on its beta and expected market
returns.
A mutual fund that seesaws in perfect sync with the market has a beta of 1.0. Portfolios that
are more volatile relative to the underlying benchmark, such as aggressive-growth funds,
have betas greater than 1.0; more conservative investments have coefficients of less than 1.0.
22

R-squared
This statistical measure represents the percentage of a fund or security's movements that can
be explained by movements in a benchmark index. For fixed-income securities, the
benchmark is the T-bill. For equities, the benchmark is the S&P 500.
R-squared ranges from 0 to 100 and reflects the percentage of a fund's movements that are
explained by movements in its benchmark index. An R-squared of 100 means that all
movements of a fund are completely explained by movements in the index. Conversely, a low
R-squared indicates that very few of the fund's movements are explained by movements in its
benchmark index.
Portfolio Turnover
It is a measure of how frequently assets within a fund are bought and sold by the managers.
Portfolio turnover is calculated by taking either the total amount of new securities
purchased or the amount of securities sold - whichever is less - over a particular period,
divided by the total net asset value (NAV) of the fund. The measurement is usually
reported for a 12-month time period.
Frequent trading carries with it frictional costs, including trading commissions and the effect
of bid/ask spreads. Mutual funds with high portfolio turnover tend to whack their investors
with taxes at the end of the year. The same generally holds for individual investors - the
higher the turnover, the poorer the performance.
One of the problems with the turnover ratio is that it only serves to describe a fund's trading
behaviour, and it cannot be used to make a value judgment. In other words, one cannot use
the turnover ratio to determine whether the transactions themselves are good or bad.
Sharpe Ratio
A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted

performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as that of
23

the 10-year U.S. Treasury bond - from the rate of return for a portfolio and dividing the result
by the standard deviation of the portfolio returns. The Sharpe ratio formula is:
It is a ratio used to compare the rate of reward with the risk of gaining that reward. The
higher the ratio, the better is the risk-adjusted performance.
Standard Deviation
Standard deviation is applied to the annual rate of return of an investment to measure the
investment's volatility. Standard deviation is also known as historical volatility and is used by
investors as a gauge for expected volatility.
Standard Deviation helps in analyzing the ‘quality’ of the average. It tells us how much the
individual numbers deviate from the average. In other words, how closely the average
represents the underlying numbers. Higher the Standard Deviation of a fund, means the fund
is more volatile and its’ returns are likely to fluctuate more. Investing in a fund with lower
standard deviation one can expect to reduce the uncertainty of returns. It does not mean that
one will not lose money; only the probability is lower.
P/E Ratio (Price-Earnings Ratio)
A valuation ratio of a company's current share price compared to its per-share earnings.
It is calculated as:
24

Companies with higher growth rates command higher P/E ratios. Confidence that a company
will improve its profitability or remain profitable generally results in a higher P/E ratio. If
profits are threatened or weak, the P/E ratio is likely to drop.
P/E Ratio (Price-To-Book Ratio)
A ratio used to compare a stock's market value to its book value. It is calculated by dividing
the current closing price of the stock by the latest quarter's book value per share. It is also
known as the "price-equity ratio" and is calculated as:
A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that
something is fundamentally wrong with the company. As with most ratios, this varies by
industry. This ratio also gives some idea of whether you are paying too much, for what would
be left if the company went bankrupt immediately.
Alpha
It is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk)
of a mutual fund and compares its risk-adjusted performance to a benchmark index. The
excess return of the fund relative to the return of the benchmark index is a fund's alpha.
A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%.
Correspondingly, a similar negative alpha would indicate an underperformance of 1%.
25

Types of research
The study is based on primary, descriptive, as well as exploratory research.
Exploratory research
Exploratory research provides insights into and comprehension of an issue or situation. It

should draw definitive conclusions only with extreme caution. Exploratory research is a type
of research conducted because a problem has not been clearly defined. Exploratory research
helps determine the best research design, data collection method, and selection of subjects.
Primary research
Primary research (also called field research) involves the collection of data that does not
already exist. This can be through numerous forms, including questionnaires and telephone
interviews amongst others.
Descriptive research
Descriptive research, also known as statistical research, describes data and characteristics
about the population or phenomenon being studied. Descriptive research answers the
questions who, what, where, when and how.
Although the data description is factual, accurate, and systematic, the research cannot
describe what caused a situation.
Sampling
Sample size
Here in this case four categories funds have been used they are balanced, large cap funds,
Index fund and tax fund of both the countries and these funds are compared. In each type of
category, five different schemes of one company have been selected and then compared with
each other in order to know the performance of which counties funds is better.
Sample size: 50 (each for US and India)
26

Location (India): Mumbai, Goa, Bangalore, Chennai, Hubli, Mysore, Mangalore,
Coimbatore
Location (United States): Washington, New York, California, Philadelphia, Ohio, Florida,
New Orleans, West Virginia, Texas, Boston, Minnesota
Sampling method
Systematic Sampling was followed since the performance of funds was easily traceable
through various websites and monthly fact sheets of particular companies.
Sampling Tools
• Questionnaire consisting of 12 questions pertaining to mutual funds were used to

study the performance of various schemes in both the countries.
• Observation and analysis through the published and unpublished sources were the
tools used.
Scope of the Study
Following is the scope of the study that clearly explains as to which aspect of the equity
mutual funds will be dealt with in detail and those factors that will not be within reach due to
certain constraints.
• The study deals with only selected mutual funds of India and similar products offered
by its American mutual funds. It has been unable to cover all funds in America and
India.
• The study deals with only dominant factors influencing the performance of Mutual
funds.
• The study covers only such schemes having more than six months of fund age as on
10th December 2009.
• Returns up to one year are absolute and over one year is annualized.
• The denominator of P/E ratio is based on an accounting measure of earnings that is
susceptible to forms of manipulation, making the quality of the P/E only as good as
the quality of the underlying earnings number.
27

Limitations of the Study
Nobody is perfect in what he/she does. Knowingly or unknowingly, he is bound to commit

mistakes. The main purpose of this study is get idea about the performance of various funds
of India and America. There were certain limitations that came in our way which are as
follows:
• The study is restricted to selected Funds both in India and in America.

• As future is uncertain, so giving a futuristic insight will be based on mere
assumptions.
• Economic and market conditions of both countries are very unpredictable (Present
and future).
This study gives only a brief idea as to how mutual funds in both the countries are
performing; an attempt has been made to represent mutual fund industry of both the countries
by taking top and best performing companies in each of the country.
28

CHAPTER IV
Findings & Conclusion
29

US Mutual Funds
Blue chip Funds

These funds often aims to provide medium to long term capital appreciation through
investment in shares of quality companies and by focusing on well established large sized
companies often leaders in their respective businesses with a scale and size that makes them
less prone to external shocks.
First
Goldman JP Morgan Morgan
American Vanguard
Sachs Equity Large Cap Stanley Inst
Parameters Large Cap Growth
Growth Growth Intl Growth
Growth Opp Equity
Strategy A Select Equity I
Yield
NAV (G)($) 26.90 10.40 16.57 9.30 9.17
AUM ($ millions) 586.20 603.30 611.80 64.30 584.70
Expense ratio 0.95 0.59 0.99 1.00 0.72
Portfolio turnover (%) 92.00 22.00 124.00 49.00 222.00
Standard Deviation 18.87 23.25 21.01 27.15 1.68
Sharpe Ratio -0.11 -0.33 -0.05 -0.15 -0.29
Beta 0.91 0.95 0.97 1.12 1.02
R-squared 92.00 96.00 84.00 97.00 87.00
P/E Ratio($) 19.40 14.70 21.60 15.10 18.10
P/B Ratio($) 3.50 1.40 3.50 1.80 3.20
Alpha 3.65 -2.99 4.89 1.03 0.11
Source – www.morningstar.com
• NAV- Higher the value better is the performance. When the NAV of First American
Large Cap Growth Opp Yield ($26.90) is compared with other funds such as JP
Morgan ($16.57) and Goldman Sachs ($10.40), its NAV is more than two times
which is definitely better than its competitors. Irrespective of the fact that all these
funds are have an existence from a long time.
• Asset under Management by these funds is quite huge. In this case, JP Morgan
Large Cap Growth Select wins the race, as the assets managed by this fund are 611.8
Million Dollars, which is comparatively higher. However, Goldman Sachs Equity
30

Growth is nearer to the JP Morgan Large Cap Growth Select whose AUM being
603.3 Million Dollars.
• Expense ratio the percentage of total fund assets that is used to cover expenses
associated with the operation of a mutual fund. Expense Ratio of Goldman Sachs
Equity Growth mutual fund is lowest which means that fund is spending less amount
on day-to-day expanses and eliminating unnecessary burden on investors.
• Portfolio turnover the conventional wisdom when it comes to stock investing is that
lower turnover is better. In this case, Goldman Sachs Equity Growth enjoys the top
position having lowest portfolio turnover. This indicates that the fund is having the
lowest churning and is less prone to risk when compared to other funds.
To evaluate the risks, parameters like Standard deviation, Sharpe Ratio, Beta and R-
squared are measured.
• Higher the Standard Deviation of a fund, means the fund is more volatile and its’
returns are likely to fluctuate more. Vanguard Growth Equity enjoys a very low
standard deviation compared to all others, which means it has sustained to keep the
volatility of the portfolio lower than its competitors offering the similar kind of
products.
• Sharpe Ratio for all the funds shows the negative figure. However, in that JP Morgan
Large Cap Growth Select fund is in better position when compared with its
counterparts.
• Beta measures a mutual fund's volatility relative to a broad benchmark. JP Morgan
Large Cap Growth Select has managed to enjoy a beta of 0.97, which means it is close
to perfect sync with the market. On the other hand, First American Large Cap Growth
has a beta of 0.91, which makes it a conservative investment whereas Vanguard
Growth Equity has a beta of 1.02, which makes it a very volatile portfolio.
• R-squared is a measure of how much of a fund's past returns can be explained by the
returns from the market overall. R-squared reflects the percentage of a fund's
movements that are explained by movements in its benchmark index. Morgan
Stanley Inst Intl Growth Equity is having highest R-Squared of 97, which is close to
100 suggesting that all movements of a fund are completely explained by movements
31

of index. Where as all other funds are having comparatively either more or less R-
squared.
• P/E ratio is a valuation ratio of a company's current share price compared to its per-
share earnings. Confidence that a company will improve its profitability or remain
profitable generally results in a higher P/E ratio. JP Morgan Large Cap Growth Select
is better among the lot followed by Vanguard Growth Equity and First American.
• P/B ratio is a ratio used to compare a stock's market value to its book value. It is also
known as the "price-equity ratio.” A lower P/B ratio could mean that the stock is
undervalued. This ratio also gives some idea of whether you're paying too much, for
what would be left if the company went bankrupt immediately. In this case, First
American Large Cap Growth and JP Morgan Large Cap Growth Select both are
having highest P/B Ratios’ when compared with Vanguard Growth equity fund.
• Alpha is often considered to represent the value that a portfolio manager adds to or
subtracts from a fund's return. A positive alpha of 1.0 means the fund
has outperformed its benchmark index by 1%. Correspondingly, a similar negative
alpha would indicate an underperformance of 1%. In this case, JP Morgan Large Cap
Growth Select fund has outperformed its benchmark index with an alpha of 4.89
compared to First American Large Cap Growth Opp Yield, which is showing an alpha
of 3.65.
32

Tax Benefit Funds
These funds often seeks medium to long-term growth of capital, with income tax rebate.
Death and taxes, they say, are the two inevitabilities. While one can hardly do anything about
the first, tax saving instruments can offer relief to alleviate some of the pain caused by the
latter. While tax-saving instruments like EPF, PPF, and NSC have been there for long, equity
linked savings scheme (ELSS) are now offering investors a way to look beyond the world of
low returns.
Goldman
Morgan
First Sachs JP Morgan Vanguard
Stanley CA
Parameters American Structured CA Tax Free CA Long
Tax-Free
Tax-Free Y Tax-Mgd Eq Bond Instl Term Tax
Income B
I
NAV (G)(Rs.) 10.79 8.82 10.36 11.29 11.03
AUM ($ millions) 100.40 241.70 265.10 336.00 2900.00
Expense ratio 0.50 0.69 0.50 0.85 0.15
Sharpe Ratio 0.12 -0.47 0.32 -0.06 0.00
Beta 1.25 1.00 0.89 1.26 1.13
R-squared 91.00 99.00 93.00 89.00 94.00
P/E Ratio($) - 15.20 - - -
P/B Ratio($) - 1.90 - - -
Alpha -1.60 -3.26 0.00 -2.98 -2.32
• The NAV of all the funds is more or less similar. However, for comparison basis
Morgan Stanley is one of the most sought after funds in the category followed by
Vanguard Long Term Tax.
• The Asset managed by Vanguard Long Term Tax fund is 2.9 billion dollars, which is
huge. Whereas, Asset managed by other funds are very less compared to this and
come no way near to this fund.
• Expense Ratio - Expenses are a big factor in long-term, relative performance, and
funds with lower expenses generally outperform those with higher expenses. In this
33

case, Vanguard CA Long Term Tax fund has successfully kept the expense ratio low
compared to all other tax benefit funds.
• Goldman Sachs structured Tax-Mgd is having the highest portfolio turnover. The
churning by the fund manager in the securities is quite high. This may happen because
lot of managers think that churning can result into higher profits. However, the fact is
higher churning results into higher expense ratio.
• On the basis of standard deviation, the maximum volatility is seen in the Goldman
Sachs structured Tax-Mgd fund obviously they are more risky and can result into
higher profit to investors followed by JP Morgan CA Tax Free Bond Instl fund. The
least volatility is observed on the funds of Vanguard CA Long Term Tax. Since
volatility is less, one can infer that the risk associated with the fund is less.
• Sharpe ratio (also known as Reward-To-Volatility Ratio) indicates the excess return
per unit of risk associated with the excess return. The higher the ratio, the better is the
risk-adjusted performance. JP Morgan CA Tax Free Bond Instl is having highest
Sharpe ratio when compared with its counterparts.
• Beta measures the fund’s volatility to a broad benchmark. Goldman Sachs Structured
Tax-Mgd has managed to be in perfect synchronization with the underlying index and
hence enjoys a beta of 1. On the other hand, JP Morgan equity has a beta of 0.89,
which means that the fund is conservative and not in sync with the market whereas
Morgan Stanley CA Tax-Free Income has a beta of 1.26, which makes it an extremely
volatile portfolio.
• R-Squared - Goldman Sachs structured Tax-Mgd is having highest R-Squared of 99,
which suggest that all movements of a fund are completely explained by movements
of index. The R-squared of other funds are not so close to the benchmark index, all
other funds are having more or less R-squared.
• The P/E and P/B ratio of all the funds are not available. Hence, the comparison has
not been possible.
• Here, most of the tax benefit funds are showing negative alpha values indicating their
underperformance. Whereas, JP Morgan CA Tax Free Bond Instl is showing an alpha
of 0, which means the fund is in sync with the benchmark index.
34

Balanced Funds
A balanced fund invests in debt and security in comparable proportion. The proportion need
not be exactly same but comparable. Balanced funds are normally investing 60% in debt and
remaining in equity. A balanced fund tends to provide investors exposures to both equity and
debt market in a one product. This provides “asset call” diversification as equity and debt
markets are not subject to same kind of external risk factors. A balanced fund gives an
investor exposure in equity at a relatively lower volatility.
First
Morgan
American Goldman JP Morgan Vanguard
Stanley Inst
Parameters Strategy Sachs Investor Balanced
Balanced
Balanced Balanced A Balanced A Index
Instl
Allc R
NAV (G)($) 9.11 17.13 11.35 12.08 19.39
AUM ($ millions) 402.20 134.40 1800.00 71.30 8600.00
Expense ratio 0.65 1.04 0.50 0.57 0.20
Sharpe Ratio -0.13 -0.14 -0.03 -0.09 -0.15
Beta 1.16 0.98 0.82 1.00 0.96
R-squared 97.00 95.00 98.00 96.00 98.00
P/E Ratio($) 16.40 16.20 18.00 18.60 16.20
P/B Ratio($) 2.00 2.20 1.90 2.50 1.90
Alpha -1.55 -1.49 0.02 -0.85 -1.54
• On the basis on NAV, Vanguard Balanced Index Fund has beaten its peer funds as
well as competitors’ offerings of similar products. This is because of the period of
which it has been in the portfolio basket of the company. It has been associated with
the company since past 9 years. However, it faces a tough competition from other
funds such as Goldman Sachs that has been performing extremely well in the recent
times and has been selected as one of the top performers in recent times.
• On the basis of Assets under Management (AUM), Vanguard Balanced fund is
around $8600 Million, which is quite a high amount when compared to the other
35

funds taken into consideration. The larger the fund the better popularity and
confidence it enjoys amongst its investors.
• Expense Ratio is a mutual fund's total annual operating expenses (including
management fees, distribution fees, and other expenses) revealed as a percentage of
the fund's average net assets. High expense ratios decrease investors' returns.
Vanguard balanced fund has very well been able to keep its edge by keeping far lower
than others in this segment thereby managing to give good returns.
• Portfolio Turnover is very high for Morgan Stanley Inst Balanced product
emphasizing the view that the portfolio manager holds a very aggressive position and
is not holding a long-term view on the funds. He just books profits and moves out,
unlike the fund manager of JP Morgan Investor Balanced who has a long-term view
on the funds and follows the buy-and-hold strategy.
• In case of Standard deviation, First American balanced fund is lagging behind when
compared with funds like JP Morgan and Vanguard etc. The fluctuation in First
American Balanced fund is more as compared to other funds, which is a cause of
concern because higher standard deviation means high risk. It indicates the tendency
of fund’s NAV to rise and fall in short period. In addition, in any fund NAV is the
performance evaluation yardstick. Same is the case with Goldman Sachs Balanced.
• In case of Sharpe Ratio, the risk-free rate assumed at 5.14% T-Bill index. JP Morgan
Investor Balanced is the best here, as the Sharpe ratios of all the funds considered are
negative. On this front, Vanguard Balanced Index Fund is in the last position when
compared with same category funds and with its competitors.
• However, the Beta of the Morgan Stanley Inst Balanced funds appears to be in perfect
sync with the underlying index with no signs of volatility. Whereas, other funds have
Beta which is either more or less than 1,which shows that they are either conservative
or volatile in nature and are not in proper sync with the market.
• In case of P/E ratio, P/E ratio of Morgan Stanley Inst Balanced fund is $ 18.6, which
is slightly higher than the other funds but facing a tough competition from emerging
funds. All other funds have a similar P/E ratio.
• In case of P/B ratio, the best performance comes from Morgan Stanley Inst Balanced
fund, which is having a P/B ratio of $ 2.5, is followed closely by other ones like
Goldman Sachs and First American.
36

• Most of the balanced funds have underperformed. Thus, showing negative alpha
values. Whereas, JP Morgan Investor Balanced fund is showing an alpha of 0.02,
which means the fund is in sync with the benchmark index.
37

Index Funds
Index funds are schemes that provide returns similar to the returns of the index they track.
They are popular among individual and institutional investors the world over because of their
lower cost and diversification. While all actively managed equity funds aim to beat the index,
an index fund aims to generate returns that replicate that of the stock market by investing in
the stocks that constitute the market index. This sort of equity investing may be suitable for
those who are looking to venture into equities, but are afraid to take big bets.
JP Morgan Morgan Stanley Vanguard

First American
Parameters Equity Index S&P 500 Index Large Cap
Equity Index A
Select A Index
NAV (G)($) 20.18 25.25 12.07 20.36
AUM ($ millions) 1000.00 1700.00 582.00 3700.00
Expense ratio 0.62 0.20 0.59 0.21
Portfolio turnover (%) 4.00 18.00 7.00 9.00
Standard Deviation 19.90 19.86 19.91 19.94
Sharpe Ratio -0.33 -0.32 -0.33 -0.29
Beta 1.00 1.00 1.00 1.00
R-squared 100.00 100.00 100.00 100.00
P/E Ratio($) 16.10 15.90 16.00 16.10
P/B Ratio($) 2.10 2.00 2.10 2.00
Alpha -0.39 -0.12 -0.37 0.38
*Goldman Sachs does not have an index fund, and hence has not been taken into consideration
• The NAV increases or decreases when the value of mutual fund’s holdings rises or
falls. Vanguard index fund is the best performer on this criterion having NAV of
$25.25, which has been unbeatable by its competitors’ similar products.
• Here, Vanguard Index fund holds the maximum amount of assets under
management that is about $3700 Million. This is because of the credibility it enjoys
due to its presence in the market since a very long time. The least is with Morgan
Stanley S&P 500 Index Fund with $582 Million. All other funds are way behind
Vanguard Index Fund.
38

• Expense ratio is the highest with First American Equity Index Fund and the least
with JP Morgan Equity Index Select Fund. This is probably due to the high AUM it
has under its portfolio in comparison with the similar products of its competitors.
• Portfolio Turnover of all these funds are very less except for JP Morgan Equity
Index Select, which is 18%. This shows that there is a very low churning in most of
the funds, which indicates that the funds are performing well.
• Standard deviation is a statistical measure of the volatility of the fund's returns. The
higher the fund's standard deviation, the greater is its volatility. Vanguard Large Cap
Index Fund is the most volatile fund; all other funds are having more or less the same
standard deviation. JP Morgan Equity Index Select is less risky compared to all other
funds.
• Here, all the values of Sharpe ratio are negative, which is not a good sign. Vanguard
Large Cap Index Fund is comparatively the best here, followed by others in the
category with almost similar Sharpe ratio.
• Beta of all the funds is 1, which means that fund is in exact sync with the market
index and is less sensitive to the market changes.
• R-squared measures how closely correlated the fund's performance was to the index.
All Index Funds enjoy the perfect figure of 100. In other words, they have a perfect
correlation with the index.
• P/E ratio gives an investor an idea of how much they are paying for a particular
company's earning power. First American Equity Index and Vanguard Large Cap
Index win the title as the best performers on this count to be closely followed by
Morgan Stanley S&P 500 Index and JP Morgan Equity Index Select.
• First American Equity Index and Morgan Stanley S&P 500 Index have the same P/B
Ratio of 2.1, which are the highest here, and they are followed by JP Morgan Equity
Index Select and Vanguard Large Cap Index who share the same P/B Ratio of 2. The
P/B Ratios of all the funds are almost the same, which shows that there is no strong
leader in this aspect of comparison.
• Alpha of most of the funds are negative which is showing their underperformance.
Vanguard Large Cap Index is the only one having a positive alpha of 0.39, which
indicates that the fund has outperformed its benchmark index by 0.39%.
39

India Mutual Funds
Blue chip Funds

Such funds aim to achieve a high degree of capital appreciation through investments in well-
established, large size blue chip companies.
Franklin ICICI SBI

Parameters Reliance UTI
India Prudential Magnum
Equity Mastershare
Bluechip Growth Contra
NAV (G)(Rs.) 181.39 15.14 119.60 54.47 47.22
AUM (Rs. crore) 2705.66 2188.40 386.56 3034.28 2327.14
Expense ratio 1.89 1.86 2.33 2.50 1.91
Portfolio turnover (%) 110.00 182.00 147.00 - 17.4
Sharpe Ratio 0.35 0.26 0.26 0.36 0.32
Beta 0.87 0.81 0.83 0.99 0.87
R-squared 0.96 0.94 0.99 0.97 0.95
P/E Ratio 26.09 26.88 26.88 22.23 25.13
P/B Ratio 5.75 3.64 4.33 3.32 4.22
Alpha 2.83 0.13 -0.15 3.74 1.94
Source – www.valuresearchonline.com
• NAV - Franklin Templeton Blue-chip fund has managed to maintain a very good
position and ahead of its competitors in the segment with a NAV of Rs. 181.39. This
shows that Franklin India Blue chip fund is outperforming its competitors.
• In terms of AUM, SBI Magnum Contra is the leader with assets of 3034.28 crores. It
has recently overtaken its competitor Franklin India Blue chip in terms of Asset under
management. Other competitors are no way near SBI Magnum Contra in terms of
assets.
• Expense ratio is sensitive to size and type of fund. Larger the fund, lower the
expense ratio. In terms of expense ratio, Reliance Equity races ahead of its
competitors because of having lowest expense ratio. However, it is on bit higher side
but still it is lesser than its competitors, which are having expense ratio approximately
2% or more than that.
40

• Portfolio turnover of Reliance Equity is very low at 1.86% as compared to others,
followed by UTI Master Share at 17.4 %. ICICI Prudential Growth is having highest
portfolio turnover of 147%, which means that it is resulting into higher expenses for
its unit holders and reducing their return.
• Franklin India Blue chip is having highest standard deviation followed by SBI
Magnum Contra and UTI Master Share. Highest Standard deviation suggests that fund
is highly volatile and can give heavy returns or losses.
• SBI Magnum Contra and Franklin India Blue chip are having comparatively higher
Sharpe ratio. All other funds are lagging behind and are having lower Sharpe ratio.
Higher the Sharpe ratio better is the performance.
• SBI Magnum Contra is having a beta of 0.99, which is same as exact 1. This shows
that the fund is in exact sync with the market and performs as market performs. All
other funds are not close to 1, which indicates that these funds are not in accordance
with the market, or are working in opposite direction.
• All these funds are having reasonable r-squared. However, SBI Magnum Contra is
having an r-squared very near to 100, which shows that Beta of fund can be trusted.
• ICICI Prudential Growth and Reliance Equity share the first position in the race with
the same P/E ratio of 26.88 all other funds lag behind except for Franklin India Blue
chip with a P/E Ratio of 26.09.
• Franklin India Blue chip is having highest P/B ratio, which shows the confidence of
investors on this fund.
• Alpha - SBI Magnum Contra has outperformed its benchmark index with an alpha of
3.74 compared to Franklin India Bluechip, which is showing an alpha of 2.83.
41

Tax Benefit Funds
Such schemes aim to provide growth of capital along with income tax exemption benefits to
investors.
Franklin ICICI
Parameters Reliance Tax SBI Magnum UTI Equity
India Prudential
Saver Taxgain Tax Savings
Taxshield Tax Plan
NAV (G)(Rs.) 174.57 17.51 116.79 56.59 35.99
AUM (Rs. crore) 732.04 1922.82 1018.53 4758.55 468.98
Expense ratio 2.21 1.91 2.12 2.50 2.31
Sharpe Ratio 0.33 0.21 0.25 0.26 0.14
Beta 0.89 0.87 0.98 0.95 0.89
R-squared 0.95 0.87 0.87 0.96 0.96
P/E Ratio 24.98 23.98 19.50 25.35 26.78
P/B Ratio 5.65 3.42 3.73 4.44 4.07
Alpha 2.22 -1.33 0.04 0.13 -3.81
• NAV of Franklin India tax shield is highest among the entire fund in this segment
followed by ICICI Prudential Tax Plan. FITS is the leader in this segment leaving all
other competitors way behind.
• SBI Magnum is having highest assets under management, which shows that this
fund enjoys the trust of its investor. This fund was launched more than 20 years ago,
that may be one of the reasons for such a huge asset under management. All other
funds are no way near this fund in terms of this criterion.
• Reliance Tax Saver is having lowest expense ratio in this criterion having expense
ratio of 1.91 followed by other funds like ICICI Prudential Tax Plan. Here, SBI
Magnum Taxgain and UTI Equity Tax Savings lag behind with high Expense ratios.
The fund managers of these funds are required to concentrate on reducing the expense
ratios.
• Portfolio turnover of ICICI Prudential Tax Plan fund is highest and UTI Equity Tax
Savings is the lowest. Higher turnover results into various costs such as brokerage,
42

commissions etc that funds ultimately cover from its unit holders. Therefore, when it
comes to Portfolio Turnover- the lower the turnover, better it is for its unit holders.
• SBI Magnum Taxgain is having higher standard deviation of 34.43. It measures the
extent to which the NAV fluctuates as compared to the average returns during a
period. A higher standard deviation means that the returns of the fund have been more
volatile due to high risk. It shows that SBI Magnum Taxgain is among the highly
volatile funds.
• A higher Sharpe ratio is better as it represents a higher return generated per unit of
risk. Franklin India Taxshield is the best performer among all these funds. All other
funds are having more or less similar Sharpe ratio.
• A low-beta fund will rise less than the market on the way up and lose less on the way
down. When safety of investment is important, a fund with a beta of less than one is a
better option. Such a fund may not gain much more than the market on the upside; it
will protect returns better when market falls. Beta of ICICI Prudential Tax Plan is
highest and very close to 1, which shows that fund moves according to market and
behaves as market or index behaves.
• Except for Reliance Tax Saver fund and ICICI Prudential Tax Plan fund all other
funds are not having a very low r-squared and can be trusted.
• Confidence that a company will improve its profitability or remain profitable
generally results in a higher P/E ratio. UTI Equity Tax Savings enjoys the highest
position in the race with the P/E ratio of 26.78. All other funds are close to this except
for ICICI Prudential Tax Plan with a P/E Ratio of 19.50.
• Franklin India Blue chip is having highest P/B ratio, which shows the confidence of
• Franklin India Taxshield has outperformed its benchmark index with an alpha of
2.22. Other funds have a comparatively very low alpha values or are negative in
nature which indicates their underperformance.
43

Balanced Funds
Balanced funds aim to provide a long-term capital appreciation and current income by
investing in equity and equity related securities and high quality fixed income instruments.
Reliance
ICICI SBI
FT India Regular UTI
Parameters Prudential Magnum
Balanced Savings Balanced
Balanced Balanced
Balanced
NAV (G)(Rs.) 43.22 18.99 39.18 46.75 71.20
AUM (Rs. crore) 302.14 147.38 265.63 462.92 1034.08
Expense ratio 2.34 2.25 2.30 2.50 2.10
Sharpe Ratio 0.31 0.54 0.11 0.27 0.24
Beta 0.89 1.04 0.94 1.08 0.98
R-squared 0.95 0.90 0.96 0.96 0.97
P/E Ratio 26.74 21.56 30.04 22.63 21.68
P/B Ratio 6.73 2.60 4.58 3.92 3.83
Alpha 2.01 9.06 -2.71 1.22 0.49
• NAV of UTI Balanced fund is the best among all the funds having NAV of 71.20
while all other funds’ NAV lies within 15 to 50. This fund has achieved NAV of sixty
plus which shows that stocks in the fund’s portfolio are extremely good and are giving
good returns.
• This type of funds usually has less amount of asset under management. These types
of funds are for those investors who want regular income on their investments along
with safety of their funds. As earlier said most of the population in India is young and
hence there are more risk takers. However, we see UTI again way ahead of its
competitors managing assets of around 1034.08 crores as compared to others, which
are having assets of less than 500 crores.
• Expense ratio of all the funds is on higher side and they are resulting into
unnecessary cut in the profits of unit holders. It shows if you invest Rs 10,000 in a
fund with an expense ratio of 1.5 per cent, then you are paying the fund Rs 150 to
manage your money. In other words, if a fund earns 10 per cent and has a 1.5 per cent
44

expense ratio, it would mean an 8.5 per cent return for an investor. Here, again UTI is
giving the best returns compared to all other funds.
• Among the recently available turnover ratios UTI Balanced fund is having a very less
portfolio turnover of 5.06 indicating a very low churning, which is unbeatable by its
competitors.
• All these funds are having a standard deviation almost equal, are showing that all
these funds in this segment are equally volatile, and are exposed to same risk that
other funds are exposed. FT India Balanced fund has the lowest standard deviation
and is comparatively exposed to less risk.
• Sharpe ratio is a measure that uses the standard deviation and excess return to
determine reward per unit of risk. High values indicate greater return per unit of risk.
Reliance Regular Savings Balanced fund steals the show on this factors loosely
followed by FT India Balanced.
• Beta of UTI Balanced fund is 0.98, which is very close to 1, which shows that the
fund is in direct sync with the market while other funds are either extremely volatile
or very conservative and are not in tandem with market.
• Again, R-squared of all the balanced funds are close to 100 except for Reliance
Regular Savings Balanced fund, which is having an R-Squared of 90. This shows that
there is no strong leader in this segment.
• P/E Ratio of ICICI Prudential Balanced fund is the highest P/E Ratio showing the
confidence that the company will remain profitable.
• FT India Balanced is having highest P/B ratio, which shows the confidence of
• Alpha is often considered to represent the value that a portfolio manager adds to or
subtracts from a fund's return. In this case, Reliance Regular Savings Balanced fund
has outperformed its benchmark index with an alpha of 9.06. Other funds have a
comparatively very low alpha values or are negative in nature which indicates their
underperformance.
45

Index Funds
An index fund provides returns that, before expenses, closely correspond to the total return of
common stocks as represented by their benchmark.
Franklin
Reliance ICICI SBI
Parameters India Index UTI
Banking Prudential Magnum
(BSE MasterIndex
ETF SPICE Index
Sensex)
NAV (G)(Rs.) 48.08 942.26 177.05 43.56 52.75
AUM (Rs. crore) 59.37 13.50 0.94 25.47 61.72
Expense ratio 1.00 0.35 0.80 1.50 0.75
Standard Deviation 34.80 - 33.94 35.42 35.17
Sharpe Ratio 0.24 - 0.24 0.19 0.22
Beta - - - 0.99 -
R-squared - - - 1.00 -
P/E Ratio 27.80 18.76 27.80 26.11 27.80
P/B Ratio 4.75 2.53 4.75 4.41 4.75
Alpha - - - -3.76 -
• Reliance Banking ETF is having a NAV of 942.26, which is excessively high

compared to its major competitors. This shows that the stocks in the fund’s portfolio
are extremely good and are giving good returns.
• All these funds are having very less assets under management and among that UTI
Master Index is having highest assets of around 61.72 crores.
• The largest component of the expense ratio is management and advisory fees. From
management fee, an AMC generates profits. Then there are marketing and distribution
expenses. All those involved in the operations of a fund like the custodian and
auditors get a share of the pie. The expense ratio of Reliance Banking ETF is the
lowest which shows that fund manager is selecting securities after proper thinking and
due diligence which will prevent unnecessary burden of expenses on its investors.
• Portfolio Turnover of Reliance Banking ETF is the lowest at five, which is a good
indicator of fund health and the efficiency of fund manager.
46

• ICICI Prudential SPICE fund has comparatively low standard deviation. However,
the standard deviations of all these funds are similar and are exposed to same risk.
• In this case, Franklin India Index (BSE Sensex) and ICICI Prudential SPICE enjoy a
comfortable position amongst the compared funds due to higher Sharpe ratios.
However, the competitor’s products have a close follow up.
• P/E Ratio of all the funds is more or less similar. This indicates the confidence that
the companies will remain profitable, giving a tough competition to each other.
• P/B ratio of all these funds is similar. This is again a tough competition, except for
Reliance Banking ETF, which has comparatively very low ratio of 2.53.
• Beta, R- Squared and Alpha of all these funds cannot be compared, as the values are
unavailable.
47

Analysis of Survey
There exists a close relationship between age, time horizon, perception of investors and their
knowledge about investments. More the investors are informed about the investment avenues
and happening in financial market, the better they will be in position to plan their savings and
investments. In order to understand this, survey was made in both US and India with the help
of a questionnaire comprising of 12 questions on mutual funds. After thorough analysis, the
inferences that can be made are as follows:
India
• Majority of the respondents were in the age group of 25-34 and they usually preferred
investing in mutual funds relatively for smaller period, which is 2-5 years and only
1/4th of respondents, were interested in investing for longer period of 6-10 years.
• Almost 75% of respondents invest in mutual funds keeping growth and income as
their prime objective. This is simply because of comparatively less responsibilities &
their belongingness to the age group where willingness to take risk is much higher as
compared to investors falling in age group of 35-44.
• It was found out that respondent’s income increases with the pace of inflation, which
means that their total investment also increases by 34% of differential amount as
currently the average saving rate in India, is 34%.
• Majority of respondents belongs to the age group of 25-34 and as they are more
willing to take risk or want their income to grow significantly this directly affects the
amount, which investors keep for emergencies. This can be inferred from the fact that
50% of respondents keeps money equivalent to meet 3-month expenses.
• As people from age group of 24-35 are risk takers they tend to invest for relatively
shorter time period as 25% of respondents invest in stock and bond mutual funds and
almost 20% of respondents prefers investing in CD’s and NSE’s.
• It was found out that majority of investors are having fair amount of experience in
investing, they are more inclined towards knowing more about various investment
instruments available, and more than half of respondents are very much aware of
various performance parameters, which in turn help investors in selection of schemes.
48

• As most of the investors in India are not familiar with the functioning of various
investment options and performance parameters, they go wrong in selection of mutual
funds and suffer losses. These losses can be due to any of the reasons may it be lack
of knowledge or lack of confidence or in-efficient investment advisors.
USA
USA is a dominant force in world economy and as per data; it represents 21 percent of the
world economy. Changing economic statistics pointed towards a possible USA recession and
that signified a global downtrend in economic cycle because of domineering impact of
American economy. The average spending of American consumers reduced significantly and
unprecedented credit crisis contributed to cause and resulted in closure of several established
investment banks. Entire world faced the heat of economic recession, which started from US,
and mutual fund industry was no exception the industry suffered losses and stood at $11.390
trillion.
Survey made US with the help of a questionnaire brought the following inferences:
• Around 64% of respondents in US belong to age group of 24-35 and they prefer
investing for a longer period of 11-20 years, which is much more than Indians who
prefer investing relatively for shorter period.
• Even though both differs in terms of age and time horizon, but when it comes to
investing in various schemes both prefer Growth and income related schemes as
everywhere one law hold good that is lesser the age of investor more he will be
inclined towards taking risk.
• Survey shows that income of most of the respondents remained same or decreased
slightly which has a direct impact on the percentage of amount invested.
• When it comes to US all the respondents of the given population, have different say
on how much amount, they are willing to keep meeting their future expenses. 34% of
them are willing to keep enough money to meet 3 month of expenses.26% like to keep
enough money to meet 6 month of expenses and remaining want to keep for 12 or
more then 12 months.
• 70% of them want to invest in income producing bonds and bond mutual funds.
49

• As investors in US are very cautious about investing in mutual fund, they tend to
collect most of information about investment options, majority (80%) of respondents
are aware of all the performance parameters, and the various schemes offered.
50

Comparison between Indian and American mutual fund industry
The Indian mutual fund industry is one of the fastest growing sectors in the World’s financial
market. The mutual fund industry in India has seen dramatic improvements in quantity as
well as quality of product and service offerings in recent years. Indeed, although the Indian
mutual-fund industry has finally started growing like a teenager since mutual funds in their
true sense were opened to the private sector in 1993.
However, the mutual-fund industry has never had it so bad. The AUM or the total corpus of
this industry has fallen down by a disastrous 27.8% by the year-end of the year 2009 and
the value has been decreased to US $19 trillion. However, the mutual fund industry is still
very urban and geared towards institutional investors". This has happened despite the fact
that the industry aggressively positions itself as a safe investment avenue that can offer better
returns than most fixed-interest-bearing investment instruments, such as bonds and deposits.
For instance - according to SEBI of the $125 trillion AUM, as much 81% comes from the
eight largest cities of India, while half of the AUM "belongs to corporate clients, banks and
financial institutions”. Nevertheless, there is not much participation of retail investors in the
other half, either.
Comparing mutual funds in India with the United States, where mutual funds truly function
as they should - to increase the wealth of smaller investors - the picture looks completely
different: more than 80% of the AUM belongs to retail investors. Then why don’t millions of
investors find mutual fund very profitable?
"One major issue with less retail participation [in mutual funds] is the income level of smaller
investors. Indian investors follow a typical investment hierarchy where risk-free investments
like bank deposits and bonds get the top priority and, after making such investments, there is
little money in the hands of the investors to invest in equity-linked mutual funds."
Then there's the question of risk perception. Experts say that since equity-linked mutual-fund
plans - the mutual-fund plans that retail investors primarily invest in stocks, retail investors
perceive "such investments as a proxy for a punt on the stock market”
Moreover, Indian mutual funds have not been able to communicate their risk profile to the
retail investors segment properly. "It is true that mutual funds per se could be risky too, but
51

when one considers this investment avenue from a longer-term perspective, say 30 years, the
daily or even few months of volatility of the stock markets should not matter,"
Nevertheless, the biggest reason Indian mutual fund plans have not been able to penetrate
deep into the retail segment is the mutual funds themselves: all have the principal focus on
growth of their AUM in which corporate and institutional markets offer an easy way.
"Moreover, most mutual-fund companies in India are grossly undercapitalized [meaning they
do not have enough capital to expand their marketing efforts], so they tend to address the
meaty area [where one marketing call could get them the business of many retail clients] to
grow."
The inflection point is that "With rising disposable incomes and confidence following three
years of a sustained bull run, the share of the retail investors' wallet in the MFs [mutual
funds] is going up; the industry expects that retail participation [will] grow much faster in the
next few years."
However, recently there has been an increase in the amount of business that mutual funds are
getting in India and it is quite significant. However, one has to look at the size of industry.
US mutual fund industry is the largest mutual fund industry in world it accounts for about
51% share. It is obvious that country’s mutual fund industry will be way ahead of India, but
when we talk about the growth rate, Indian mutual fund industry comes in one of the rapidly
growing industry. Lot of new foreign AMC’s is now coming in the market. Again, if we talk
about the US mutual fund industry is nearly at its saturation stage because it is very huge and
market has been almost over. The recent slowdown in the American economy can affect the
mutual fund industry also because it is very deeply hurting the market in US. Ultimately, it
can be felt on mutual fund industry also.
52

The Future of Mutual Funds in India
Apparently, nothing but change is stable in the world, which interestingly offers both –
opportunities and challenges. Change is an exciting opportunity to reposition oneself because
of the survival crisis created by unanticipated change or the excitement offered by the
unfolding of new caverns of opportunities, which were not visible to the naked eye. The
future looks nonlinear, discontinuous and unpredictable and what matters most today is the
capability to deal with the future. Therefore, it has become imperative to weave clear-cut
strategies to strengthen each link in the value chain to deal with these changing dimensions of
the business landscape.
To lead one needs to be different and to be different one need to innovate strategically on a
persistent basis. Only differentiation can help someone redefine the basis of competition and
emerge as a leader.
The Indian mutual funds industry has been growing at a healthy pace of 16.44% for the last 8
years, which is far superior as compared to the growth rate for the worldwide mutual fund
industry, which has been around 13% in the same period. The Indian mutual funds industry
has Rs 774,796 crores worth of assets under management as on 31 October 2009, which is a
spectacular growth from previous years. The growth can be attributed to the booming equity
markets in majority of the countries across the globe. The rise has been higher in case of
India because of the comparatively smaller base.
The Indian MF Industry have grown on the back of some really strong performance of the
Indian equity market, but, one should keep in mind the fact that the recent global economic
crisis which shook the entire world did not spare India and caused lot of upheavals in mutual
fund industry of India. Now, what remains to be seen is whether the industry is mature
enough to handle the downside as well, when the tide is not in the favor.
For the industry to emerge as a preferred investment vehicle for the common investor, it has
to overcome other hurdles also such as, penetration and expanding the market reach. The
existing network of Distributors that the industry is heavily reliant on is concentrated in few
major cities and metros only and it has to expand geographically.
53

Latest Development in the Field of Mutual Funds
The mutual fund industry is one of the fastest growing sectors in the Indian capital and
financial markets. The mutual fund industry has seen dramatic improvements in quantity as
well as quality of product and service offerings in recent years. With its growth, it has
resulted in an increase in the GDP of the country.
Capital market development (reflecting investor confidence in market integrity, liquidity, and
efficiency) and financial system orientation are found to be the main determinants of mutual
fund development. Restrictions on competing products may have acted as a catalyst for the
development of money market and (short-term) bond funds.
However, the Indian asset management industry is still in the nascent stages of growth
compared to developed countries.
Below are some of the new areas in which the mutual fund industry has developed.
Investment in gold
Historically, gold has been a proven method of preserving value when a national currency
was losing value. If your investments are valued in a depreciating currency, allocating a
portion to gold assets is similar to a financial insurance policy. In the past year, the climb in
the price of gold above $700 per ounce is due to many factors, one being that the dollar is
losing value.
Reasons favouring to invest to Gold
• Gold price appreciation makes up for lost interest, especially in a bull market.
• The last four years are the beginning of a major bull move similar to the 70's when
gold moved from $38 to over $800.
• Central banks in several countries have stated their intent to increase their gold
holdings instead of selling.
• All gold funds are in a long-term uptrend with bullion, most recently setting new all-
time highs.
• The trend of commodity prices to increase is relative to gold price increases.
54

• Worldwide gold production is not matching consumption. The price will go up with
demand.
• Most gold consumption is done in India and China and their demand is increasing
with their increase in national wealth.
• Several gold funds reached all-time highs in 2009 and are still trending upward.
• The short position held by hedged gold funds is being methodically reduced.
• If you believe in 'buy low, sell high', gold is still low, but climbing.
Why Invest in Gold Mutual Funds?
Gold Mutual funds - A relatively safe method of buying and owning gold stocks allows the
owner to diversify among many stocks and allows the investing decisions to be made by a
professional. Investment methods vary among funds and provide many different styles of
portfolio management for an investor to choose from. Prices move faster and further in both
directions than the price of gold.
• The 22 funds evaluated by Eagle Wing Research can be bought, sold, or exchanged
on any market day, do not have a storage or liquidity problem and will quickly send
you a fund prospectus upon request. It is easy to get in and out of it.
• Provide professional management and diversification within the gold sector.
• Are more volatile than the S&P index.
• May or may not have any correlation with the general market.
• Move daily with the price of gold, but not always.
• Move proportionally more than gold, up and down.
The real estate sector and the road ahead
Real Estate Mutual Funds (‘REMFs’)
The SEBI Board has now approved the guidelines for the much-awaited Real Estate Mutual
Funds.
“Real Estate Mutual Fund Scheme” is defined to mean a scheme of a mutual fund, which has
investment objective to invest directly or indirectly in real estate property.
55

Governing Law
It is proposed that REMFs will be governed by the provisions and guidelines issued under
SEBI (Mutual Funds) Regulations. REMFs, shall initially, be close ended. The units of
REMFs shall be compulsorily listed on the Stock Exchanges and Net Asset Value (NAV) of
the scheme shall be declared daily.
Custodian
The REMFs would be required to appoint a Custodian who has been granted a Certificate of
Registration to carry on the business of Custodian of securities by the SEBI Board. The
custodian would safe keep the title of real estate properties held by the REMFs.
Investment Criterion:
It is proposed that REMFs could invest in the following: -
• Directly in real estate properties within India

• Mortgage (housing lease) backed securities
• Equity shares / Bonds / Debentures of listed / unlisted companies, which deal in
properties and undertake property development
• Other securities
The onset of Interval funds
The newly established "interval" funds will allow investors to sell their shares back to the
fund at specified intervals -- every quarter, for instance. Currently, open-end funds have to
redeem shares within seven days, meaning the funds must hold onto cash that could
otherwise be used for investment in case a holder wants to sell shares.
Because closed-end funds do not offer redeemable shares, investors in the funds who want to
sell their holdings must do so in the secondary market, where prices may be below net asset
value.
56

Challenges for Indian Mutual Fund Industry in India
The Indian mutual fund industry needs to widen its range of products with affordable and
competitive schemes to tap the semi-urban and rural markets in order to attract more
investors.
The industry has still not been able to penetrate among retail investors and it needs to share
best practices from mature markets like US and Britain where mutual funds are the most
preferred form of investment.
Mutual fund companies need to introduce products for the semi-urban and rural markets that
are affordable and yet competitive against low-risk assured returns of government sponsored
saving schemes such as post office saving deposits.
The industry is also overwhelmed by scarce technological infrastructure and needs to

collaborate with other sectors of the economy such as banking and telecommunications.
Mutual fund companies are also required take advantage of the growing opportunity in the
commodities market. With a strong regulatory framework, clear guidelines, and the talent to
back it up, the Indian mutual fund industry is in a position to cater to the new breed of
investors who are keen to diversify their risks.
The mutual fund industry also faces some major challenges in terms of labour crunch,
diminishing talent pool of fund managers, pressure of consolidation, innovation and product
differentiation as increasing responsibility is being placed on the trustees to ensure that the
funds are managed to the full benefit of the unit holders.
Future of Mutual Funds in America
Mutual funds sought to profit at the expense of their long-term unit holders through a variety
of complex and subtle ways. Some managers would allow a favoured short-term trader,
usually a hedge fund, to take profits that should have been shared by all unit holders. This
would occur in international share funds where stock markets would be closing at different
times around the globe. Mutual fund prices change every day and the pricing mechanism is a
dark science. No individual investor was ever going to notice.
57

Because of the deepening scandal a few years back, pressure from the regulator and a need to
start to regain the confidence of the 92 million Americans who have money in mutual funds,
1596 funds reduced their fees, and only 105 increased them. The $9.6 trillion US mutual fund
industry may be tainted and on the nose with US investors, but it still enjoys a pre-tax profit
margin of 34 per cent - one of the highest of any industry there. There is more regulatory
oversight and strengthening of corporate governance of the funds. For example, mutual fund
boards are now required to have independent directors
Obstacles in Progress
The past few years have been eventful for the U.S. mutual fund industry. Yet, amid the
revelations about late trading and market-timing abuses and criticisms about other business
practices, the industry’s foundation has been strengthened to provide a more robust platform
for the future. There were many storylines within the U.S. mutual fund industry. Fund
management and boards sought ways – through changes in governance mechanisms and
business practices – to better serve fund shareholders. Fund management enhanced policies
and procedures and worked with service providers to monitor and enforce compliance with
applicable laws and regulations.
Competition
The industry is confronting increasing competition from other financial services sectors and
growing investor awareness of attractive alternative investment vehicles; e.g., separately-
managed accounts, hedge funds, exchange-traded funds, real estate investment trusts, etc.
There has been increased dialogue between fund management and directors about the relative
position of their fund group(s) in the context of the mutual fund industry as well as the
overall investment products marketplace – in effect, assessing the sufficiency of, and
potential competitive threats to investors’ ongoing interest in, current fund offerings.
This discussion has helped fund organizations focus on gaps in fund offerings, given desired
and available distribution outlets and advisory competencies; redundant funds; unexpected
divergences between the profile of their current and targeted shareholders (often seen in asset
58

disparities among classes of shares among funds); potential misallocation of internal or
external resources supporting the funds; and areas of potential business conflict (allowing risk
mitigation measures to be put in place before unintended consequences arise).
Investment Performance
Mutual fund investors are becoming more knowledgeable about investment performance,
receiving information through the Internet, fund rating services, fund communications,
financial advisors, retirement plan advisories, etc.
Distribution
In its simplest form, fund businesses grow when their funds generate above average to
superior investment returns over time, fee structures are competitive, effective distribution
channels exist and financial intermediaries/shareholders are provided high-quality services.
Fund management and directors increasingly are centered on these interdependencies and
face difficult questions about how best to serve fund shareholders while mindful of the
importance of sustaining the vitality of their sponsoring fund organizations. Some observers
note that fund management strategies using additional compensation for financial
intermediaries aimed solely at driving increased distribution – without consideration of other
factors influencing purchasing decisions – may have less impact than generally believed in
increasing sales of funds.
Late Trading
The basic accusations concern "market timing" and illegal late trading of mutual fund shares,
both of which benefit an elite group of investors and fund managers at the expense of
millions of small investors. Both of these are manipulations made possible by the peculiar
way in which mutual funds are priced.
The other practice that has been used to deprive small investors of returns at the cost of a
favoured group of insiders of elite investors is known as late trading. In this case, managers
59

can benefit particular selected clients by processing orders as if they were placed before the
close of the trading day, instead of later. This is because orders usually take several hours to
process, so that trades are usually allowed to go through to the mutual fund well after closing,
as long as the original order was placed before the close of the trading day. Therefore,
brokers can simply declare that a particular order was placed earlier.
It is now clear that these practices were not restricted to a few unscrupulous mutual fund
managers, but were actually widespread across the hedge fund and mutual fund industries.
60

Bibliography
• www.amfi.com
• www.valuresearchonline.com
• www.mutualfundsindia.com
• www.morningstar.com
• www.bloomberg.com
• www.economywatch.com
• www.investopedia.com
• www.finance.yahoo.com
• www.ici.org
• www.icifactbook.org
• www.rbi.org.in
• www.sebi.gov.in
• www.worldbank.org
• www.ssrn.com
• Brochures and fact sheets of various funds from respective web pages
• Mutual Fund Insight
• South Asian Journal of Management
• Dalal Street Investment Journal
61

Annexure
Mutual Fund: An open-end investment company that buys back or redeems its shares at
current net asset value. Most mutual funds continuously offer new shares to investors.
Trustee: One designated to hold property for another, pending the performance of an
obligation. In a deed of trust state, the trustee is often the title company that handled the
property sale closing.
Custodian: This is the bank or trust company that maintains a mutual fund's assets, including
its portfolio of securities or some record of them. Provides safekeeping of securities but has
no role in portfolio management.
Fund assets: Amount of assets currently in the fund.
Equity Fund: A mutual fund whose portfolio consists primarily of the stock (equity).
Management Fee: The charge made to a mutual fund for supervision of its portfolio, usually
expressed as a percentage of assets.
Return: A statistical measure of the performance of a fund over time. It comprises the result
of reinvestment of capital gain in shares, reinvestment of income dividends and increase or
decrease in net asset value resulting from the market value of shares.
Net Asset Value: Also known as NAV, this is the unit price (or rupee value) of one unit of a
mutual fund. NAV is calculated at the end of every business day. It is calculated by adding up
the value of all the securities and cash in the mutual fund’s portfolio, subtracting the fund’s
liabilities and dividing that number by the number of units that the fund has issues. It does not
include a sale charge. The NAV increases (or decreases) when the value of the mutual fund’s
holdings increases (or decreases).
Portfolio: A collection of securities owned by an individual or an institution (such as a

mutual fund) that may include stocks, bonds, and money market securities.
Portfolio Turnover Rate: The rate at which the fund's portfolio securities are changed each
year. If a fund's assets total Rs100mn and the fund bought and sold Rs100mn worth of
securities that year, its portfolio turnover rate would be 100%. Aggressively managed funds
62

generally have higher portfolio turnover rates than do conservative funds that invest for the
long term. High portfolio turnover rates generally add to the expenses of a fund.
Expense ratio: The percentage of total assets used to pay for fund expenses.
Blue chip: It is a share in a large, safe, prestigious company, of the highest class among stock
market investments. A blue chip company would be called thus by being well known, having
a large paid-up capital, a good track record of dividend payments and skilled management.
Index Fund: A mutual fund that seeks to mirror general stock-market performance by
matching its portfolio to a broad-based index (e.g. BSE Sensex is an index fund).
Diversification: It is the policy of spreading investments among a range of different

securities to reduce the risks inherent in investing.
Capital Growth: A rise in market value of a mutual fund's securities, reflected in its net asset
value per share is capital growth. This is a specific long-term objective of many mutual
funds.
Beta: Beta is the measure of the relative sensitivity of a stock or mutual fund to the market.
The higher the beta, the more the volatile the stock or fund is considered to be relative to the
market as a whole. The BSE Sensex is assigned a beta of 1.
Standard deviation: Standard deviation is a measure of total risks. In other words, it

measures the volatility of returns of the fund. It indicates the tendency of the fund’s NAV to
rise and fall in a short period.
R- Squared: The R-squared of a fund advice if the beta of a mutual fund is measured against
an appropriate benchmark. Measuring the correlation of a fund’s movements to that of an
index, R-squared describes the level of association between the fund’s volatility and market
risk, or more specifically, the degree to which the fund’s volatility is a result of the day-to-
day fluctuations experienced by the overall market.
Sharpe Ratio: The Sharpe ratio (also known as Reward-To-Volatility Ratio) indicates the
excess return per unit of risk associated with the excess return. The higher the Sharpe Ratio,
the better is the performance.
63

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A Research Report on

Comparison between the Indian and US

Alliance School of Management

Electronic copy available at: https://ssrn.com/abstract=1535430

Chapter II: Literature Survey 17

Chapter III: Methodology 20

Chapter IV: Findings & Conclusion 29

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People often invest in various asset classes:

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S&P 500 – USA Bovespa – Brazil FTSE100 – UK DAX – Germany

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Mutual Funds Globally

Worldwide Mutual Fund Assets

Source – ICI Research and Statistics

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2007 2008 2009

Source – ICI Research and Statistics

Percent of Worldwide Mutual Fund Assets by Region, 2009:Q2

Source – ICI Research and Statistics

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2004 2005 2006 2007 2008 2009

Mutual Fund Industry in America

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Major factors affecting mutual fund industry worldwide

Source – UN, CLSA Global Growth in Working- Age Population (15-64)

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What does this mean?

A younger and working age population means:

• Income levels to rise

Movement in Global Markets

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Source – ICI Research and Statistics

Inflation affects the Return

10.00 10.00 8.0

6.4 8.50 6.5

Source – RBI (Bank Deposit Rate); CitiGroup (Inflation)

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Introduction to Equity Mutual Fund

Cumulative Annualised Returns

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Madhumita Chakraborty, P K Jain and Vinay Kallianpur, South Asian Journal of

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Kotak and CNCC-TV18, “Everything you wanted to know about investing”

W F Sharpe, 1994, Journal of Portfolio Management, “The Sharpe Ratio”

W F Sharpe, 1966, Journal of Business, “Mutual Fund Performance”

Daryl Chia Rui Ming, July 2008, “Investment management”

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Objective of the Study

Net asset value (NAV)

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A measure of what it costs an investment company to operate a mutual fund. An expense

Assets under Management

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in

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A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted

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P/E Ratio (Price-Earnings Ratio)

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