CHAPTER-1

Comperative statement analasis of mutul funds

Introduction: 1.1 Introduction Meaning:The Indian economy is enjoying a boom period. Every individual wants to cash in on this. There are various investment
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options available to the individual. The options could be a bank deposit, a post office account, investment in shares, real estate, bullions etc. with so many options available, it is but obvious that one faces a dilemma as to which investment option; one should go for and also at the same time having a diversified portfolio. A mutual fund is an ideal investment option to solve this dilemma. A mutual fund is a pooled investment where like-minded investors come together and invest with a common objective. Thus the funds are pooled from the various investors who are geographically spread. These funds are collected and managed by professionals. Information of the markets is a key factor, which is not widely available to the common man at the precise moment. The professionals solve this problem. Based on the investment objective, the funds collected are invested in various marketable securities, in order to have a diversified portfolio and minimize the risk. World
wide, the Mutual Funds or the Unit Trust as it is called in some parts of the world, has a long and successful history. The popularity of the Mutual Fund has increased manifold. In developed Financial Markets, like the United States, Mutual Funds have almost overtaken bank deposits and total assets of insurance funds. As of date, in the US alone there are over 5,000 Mutual Funds with total assets of over US$3 trillion (Rs.100 lakh crores).In India Mutual Fund Industry started with the setting up of UTI in 1964. Public Sector Banks and Financial Institutions began to establish Mutual Funds in 1987. The Private Sector and Foreign Institutions were allowed to set up Mutual Funds in 1993. Today, there are over 29 Mutual Funds and over 300 Schemes with total assets of approximately Rs.10,000 Crores. This fast growing industry is regulated by the SEBI.The study was

undergone as a part of the Master of Business Administration for a period of two months starting from 01/04/05 to

31/05/05 for the award of the degree under Osmania University. The study covers the Performance evaluation of the Mutual Funds in India with a Market study on the investors of the
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Mutual Funds in India. The financial system comprises of financial institutions, instruments and markets that provide an effective payment and credit system that facility the channeling of funds from savers to the investors of the economy. Indian Mutual Funds have emerged as strong financial stability to the financial system. Mutual Funds have opened new vistas to investors and imported much needed liquidity to the system. Mutual Funds are dynamic financial institutions, which play a crucial role in an economy by mobilizing savings and investing in the capital markets savings and the investing in the capital markets. Therefore, the activities of Mutual Funds have both short and long term impact on the savings and capital market and national economy. Mutual Funds provide households an option for portfolio diversification and relative risk aversion through collection of funds from the households and makes investments in the stock and the debt market.

A mutual fund is a financial intermediary that pools the savings of investors for collective investment in a diversified portfolio of securities. A fund is mutual as all of its returns, minus its expenses, are shared by the funds investors. The Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 defines a mutual fund as a a fund established in the form of a trust to raise money through the sale of units to the public or a section of the public under one or more schemes for investing in securities, including money market instruments. According to the above definition, a mutual fund in India can raise resources through sale of units to the public. It can be set up in the form of a Trust under the Indian Trust Act. The definition has been further extended by allowing mutual funds to diversify their activities in the following areas: 3

 Portfolio management services Management of offshore funds Providing advice to offshore funds Management of pension or provident funds Management of venture capital funds Management of money market funds Management of real estate funds A mutual fund serves as a link between the investor and the securities market by mobilising savings from the investors and investing them in the securities market to generate returns. Thus, a mutual fund is akin to portfolio management services (PMS). Although, both are conceptually same, they are different from each other. Portfolio management services are offered to high net worth individuals; taking into account their risk profile, their investments are managed separately. In the case of mutual funds, savings of small investors are pooled under a scheme and the returns are distributed in the same proportion in which the investments are made by the investors/unit-holders. Mutual fund is a collective savings scheme. Mutual funds play an important role in mobilising the savings of small investors andchannelising the same for productive ventures in the Indian economy.

 1.2. Objective of the study:

The core Objective of study is to:

1)

This study identifies the sources of strength and Weakness of selected growth mutual funds.

2) This study finds out the risk- return and growth rate of selected growth mutual funds.

3) To compare the performance o growth mutual funds with reference to Sharpes and Tenors performance evaluation of portfolio.

4) Measuring the risk premium of the portfolio through Sharpes performance index.

5) Measuring the relation between market return and fund return through Tenor performance index.

1.3 Scope of the Study:

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Mutual fund industry today, with about 34 players and more than five hundred schemes, is one of the most preferred investment avenues in India. However, with a plethora of schemes to choose from, the retail investor faces problems in taking decisions with respect to various schemes. Factors such as investment strategy and management style are qualitative, but even the rate of return, dividend frequency and liquidity might be taken into consideration by investor. A possible scenario is that the investor establishes a set of criterion attributes for evaluating a scheme /option /plan with a minimum acceptance level or cutoff point for each attribute. For example, assume that an investor has minimum liquidity parameter for a scheme. If an asset management company offers a package that scheme performs on other criteria like dividend frequency, rate of return,etc.

If that scheme exceeds the minimum acceptance level with respect to dividend frequency criteria, the investor might just reject the offer if the investor is dividend conscious. But if on the other hand if the investor is not dividend conscious, that investor would accept higher liquidity even if it costs him/her more.

Therefore, the acceptance or rejection of an alternative depends on the order or more specifically the order among the criterion attributes. Hence, it is of paramount importance to have an idea of the investors perceptions towards attributes, which they consider as favorable/ unfavorable with respect to a fund/scheme/option etc.

This study attempts to find out the return-risk and asset allocation and risk diversification of various growth mutual funds, which motivates an individual to invest in mutual funds and also their pattern of preference.

Limitations of The Study :

1. A mutual fund is a pool of money from many investors that is used to invest in one portfolio of securities for the benefit of all the investors in the fund. 2. Mutual fund investors buy shares in the mutual fund. Each share represents a piece of every investment made by the money managers that oversee the mutual fund. 3. Although mutual funds allow you to invest in many sectors of the economy at once, mutual funds do have limitations worth considering before you invest.

4. The lack of information sources for the analysis part

5. Though I tried to collect some primary data but they were too inadequate for the purposes of the study 6. Time and money are Critical factors limiting this Study

. 7. The data provided by the prospects may not be 100% correct as they too have limitations. 8. The study is limited to selected mutual fund schemes.
9. Each mutual fund that the SBI Mutual Fund Company manages has certain restrictions on how client funds may be invested.

1.5 Research & Methodology: Research Based on Secondary data collection and analysis using Internet, Key Information Memorandums, Fact Sheets of Mutual Funds, Companys Brochures and Periodicals. 7

Primary Data collection and analysis through the administration during face to face and telephonic interviews with the clients of the company especially the HNIs or by sending it to them through the internet. Use of Mathematical and Statistical Tools: Financial Risk Analysis: Calculating Total Risk associated with each mutual fund scheme(10 schemes) using Standard Deviation of the returns of the scheme for a period of 36 months (12 quarters) from its mean and using Sharpe Ratio, Calculating Market Risk associated with each mutual fund scheme using Beta Coefficient (Systematic Risk) of each of the mutual fund scheme when compared with the Risk of Market Portfolio (i.e. the Benchmark Index) and using Treynor Ratio, So as to determine the actual risk associated with each of the schemes. Return Analysis: Returns of the mutual fund schemes (10 schemes) for a period of 36 months (12 qtrs) have been analyzed for calculating Alpha values which shows the returns of the schemes when the market returns are zero. Descriptive Analysis: Descriptive Analysis of the Returns, Asset under Management of various mutual fund schemes of the different mutual funds using tables and graphs.

1.6 Theoretical Aspects Evolution of the Mutual Fund Industry

The flow chart below describes broadly the working of Mutual Fund

The end of the second millennium marks 36 years of existence of mutual funds in this country. The ride through these 36 years has not been smooth. UTI commenced its operations from July 1964 .The impetus for establishing a formal institution came from the desire to increase the propensity of the middle and lower groups to save and to invest. UTI came into existence during a period marked by great political and economic uncertainty in India. With war on the borders and economic turmoil that depressed the financial market, entrepreneurs were hesitant to enter capital market. The already existing companies found it difficult to raise fresh capital, as Investors did not respond adequately to new issues. Earnest efforts were required to channelize savings of the community into productive uses in order to speed up the process of industrial growth. The then Finance Minister, T.T. Krishnamachari set up the idea of a unit trust that would be "open to any person or institution to purchase the units offered by the trust. However, this institution as we see it, is intended to cater to the needs 9

of individual investors, and even among them as far as possible, to those whose means are small." His ideas took the form of the Unit Trust of India, an intermediary that would help fulfill the twin objectives of mobilizing retail savings and investing those savings in the capital market and passing on the benefits so accrued to the small investors. The history of mutual funds in India can be broadly divided into four distinct phases: First Phase 1964-87 An Act of Parliament established Unit Trust of India (UTI) on 1963. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management. Second Phase 1987-1993 (Entry of Public Sector Funds) The year1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first nonUTI Mutual Fund established in June 1987 followed by Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores. 10

Third Phase 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more Comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs.1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds. Fourth Phase since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs. 29, 835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.

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The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of October 31, 2003, there were 31 funds, which manage assets of Rs.126726 crores under 386 schemes.

The graph indicates the growth of assets over the years.

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Figure 2. Growth in assets under management Merits of Investing In Mutual Funds Affordability: Of course you dont need to be millionaire to invest in mutual fund as the minimum investment in mutual fund starts from Rs.500/-. A Mutual Fund because of its large corpus allows even a small investor to take the benefit of its investment strategy.

Diversification: Mutual Funds diversify your portfolio by investing in various securities & minimize the risk. This kind of a diversification may add to the stability of returns, for example during one period of time equities might under perform but bonds and money market instruments might do well enough to offset the effect of a slump in the equity markets. Similarly the information technology 13

Sector might be faring poorly but the auto and textile sectors might do well and May protect your principal investment as well as help you meet your return Objectives. Variety: Mutual funds offer a tremendous variety of schemes. This variety is beneficial in two ways: first, it offers different types of schemes to investors with Different needs and risk appetites; secondly, it offers an opportunity to an investor to invest sums across a variety of schemes, both debt and equity. For example, an investor can invest his money in a Growth Fund (equity scheme) and Income Fund (debt scheme) depending on his risk appetite and thus create a balanced portfolio easily or simply just buy a Balanced Scheme. Professional Management: The management of a portfolio involves continuous monitoring of various securities and the innumerable economic and non-economic variables that may affect portfolios performance. This requires a lot of time and effort on the part of the investor, along with indepth knowledge of the functioning of the financial markets. Thus investment in mutual funds produces better results as knowledgeable and experienced professionals, who are totally devoted to tracking and updating the portfolio, manage it.

Tax Benefits: 1. Tax benefits are available under section 48 and 112 of the Income Tax Act, 1961 on capital gains for resident Indians. Short-term capital gains from equity schemes will be taxed at 10% (plus applicable surcharge and education cess), while long-term capital gains will not be subject to any tax. This is in addition to the Securities Transaction Tax.

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2. Under Section 10(23D) of the IT Act, 1961 Income distributed by equity schemes will not be subject to dividend distribution tax and will be tax-free in the hands of the investors. 3. Units held will not be liable to wealth tax. Well - Regulated: All Mutual Funds in India are registered with the regulator of the Indian securities industry - the Securities and Exchange Board of India (SEBI). The funds function within the framework of regulations designed by SEBI. These regulations relate to the formation, administration and management of mutual funds and also prescribe disclosure and accounting requirements. Such a high level of regulation seeks to protect the interest of investors. Liquidity: In open-ended mutual funds, investor can redeem all or part of his units any time he wish to. Some schemes do have a lock-in period where an investor cannot return the units until the completion of such a lock-in period. In case of close-ended schemes: It can be traded in the secondary market, if it is a listed security It can be redeemed with the asset management company (AMC), with the applicable clauses. Off market transfers. Flexibility: Mutual Funds offering multiple schemes allow investors to switch easily between various schemes. This flexibility gives the investor a convenient way to change the mix of his portfolio over time. Transparency: Open-ended mutual funds disclose their Net Asset Value (NAV) daily and the entire portfolio monthly. This level of transparency, where the investor himself sees the underlying assets bought with his money, is unmatched by any other financial instrument. Thus the investor is in the knowledge of the quality of the portfolio and can invest further or 15

redeem depending on the kind of the portfolio that has been constructed by the investment manager. Convenience: An investor can purchase or sell fund units directly from a fund, through a broker or a financial planner. The investor may opt for a Systematic Investment Plan (SIP) or a Systematic Withdrawal Advantage Plan (SWAP). In addition to this an investor receives account statements and portfolios of the schemes. Low Transaction Costs: Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.

Demerits of Mutual Funds: No Assured Returns: No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual fundsthan when they buy and sell stocks on their own. However, anyone who invests through a mutual fund diversifies and minimizes his risk as direct investment in one of the comparable securities. Fees And Commissions: All funds charge administrative fees to cover their day-to-day expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Management Risk: When invest in a mutual fund, investors depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the fund manager does not perform as well as expected they might not make as much money on their investment as expected. Of course, if they invest in Index Funds, they forego management risk, because these funds do not employ managers. Mutual Fund industry is 16

required to address this problem, as we believe that bigger the size of asset, bigger is the problem. Large funds end up paying more for the stock they purchase and sell them at a lower price thus reducing the returns to the investors Scheme Risks: There are certain risks inherent in the scheme itself. It all depends upon the nature of the scheme. For instance, in pure growth scheme, risks are greater. It is obvious because if one expects more returns as in the case of a growth scheme, one has to take more risks.

Nature of scheme Aggressive Moderate

Risk High Moderate

Return High Moderate

Political risks: Successive governments brings with them fancy new economic ideologies and policies. It is often said that many economic decisions are politically motivated. Changes in the government bring in the risk of uncertainty, which every player in the financial service industry has to face. So mutual funds are no exception to it. No tailor made portfolio: Mutual fund portfolios are created and marketed by AMCs into which investors invest. They cannot create tailor made portfolios.

Classification of Funds: Any mutual fund has an objective of earning income for the investors and or capital appreciation. To achieve these objectives mutual funds adopt different strategies and accordingly offer different schemes of investments. The funds can be broadly classified into:

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On the basis of tenure: Close-ended schemes: A close-ended fund is open for subscription only during a specific period, generally at the time of new fund offering (NFO). The features of close-ended funds are: a. The period and the target amount of the fund are definite and fixed beforehand. b. Once the period is over and the target is reached, the door is closed for the investors. They cannot purchase any more units. c. These units are publicly traded through stock exchange and generally there is no repurchase facility by the fund. d. e. The main objective of the fund is capital appreciation. The whole fund is available for the entire duration of the scheme and there will not be any redemption demands before its maturity. Hence the fund manager can manage the investments efficiently and profitably without the necessity of maintaining and liquidity. f. At the time of redemption, the entire investment pertaining to a close end scheme is liquidated and the proceeds are distributed among the unit holders. g. From the investors point of view, it may attract more tax since the entire capital appreciation is realized in total at one stage itself.

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h.

If the market condition is not favorable, it may also affect the investor since he may not get the full benefit of capital appreciation in the value of the investment.

Open-ended schemes: Open-ended fund is open for subscription all through the year. An investor can buy or sell the units at NAV (Net Asset Value) related Price at any time. The features of open-ended funds are: a. There is complete flexibility with regard to ones investment or Disinvestments. In other words, there is free entry and exit of investors in an open-ended fund. There is no time limit. The investor can join in and come out from the fund as and when he desires. b. The units are not publicly traded. However, the AMC is ready to Repurchase and reissue them any time. c. The investor is offered instant liquidity in the sense that the units can Be sold on any working day. d. The main objective of this fund is income generation. The investors get Dividend, rights or bonuses as reward for their investments. e. Since the units are not listed on the stock market, their prices are linked To the net asset value of the units. The NAV is determined by the fund and it varies on daily basis.

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f. Generally, the listed prices are very close to their net asset value. The fund purchases at different prices for their purchases and sales. The price difference is due to the existence of entry/exit loads. g. The fund manager has to be very careful in managing the investments because he has to meet the redemption demands at any time during the lifetime of the scheme.

Interval Schemes: These schemes combine the features of open-ended and closed - ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV based prices. On the basis of investment objective: Equity Funds: These schemes, also commonly called growth schemes, seek to invest a majority of their funds in equities with high growth potential and a small portion in money market instruments. The main features of the Growth funds are: a. Scheme aims to deliver superior returns over the long term in the form of capital appreciation. Hence, they have been described as nest eggs investments. b. The fund may declare dividend but its principal objective is only capital appreciation. c. The NAV prices of equity fund fluctuates with market value of the underlying stock which are influenced by external factors such as social, political as well as economic.

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d. This is best suited to salaried and business people who have high risk bearing capacity and ability to defer liquidity. They can accumulate wealth for future needs.

Equity based schemes can be further classified as under: Diversified Equity Funds: A fund that seeks to invest only in equities, except for a very small portion in liquid money market securities, bur is not focused on any one or few sectors or shares, may be termed a diversified equity fund. While exposed to all equity price risks, diversified equity funds seek to reduce the sector or stock specific risks through diversification. Equity Linked Savings Schemes: An Indian Variant Investment in these schemes entitles the investor to claim an income tax rebate, but usually has a lock-in period before the end of which funds cannot be withdrawn. According to prevailing IT Act, 1961 the lock-in period is for a minimum duration of three years. Sector Funds: These funds choose to invest in one or more

predetermined sectors of the equity markets, depending upon investor preference and return risk attributes. These funds are not as well diversified as diversified equity funds. Hence, they can exhibit very volatile returns. For instance, funds such as IT fund, Pharma fund, FMCG fund etc. Index Funds: An index fund tracks the performance of a specific stock market index. The objective is to match the performance of the stock market by tracking an index that represents the overall market. The funds invest in share that constitute the index and in the same proportion on the index. The value of these index-linked funds will automatically go up whenever the market index goes up and vice versa. Since the construction of portfolio is entirely based upon maintaining proper proportions of the index being followed, it involves less administrative expenses, lower 21

transaction costs, less number of portfolio managers etc. It is so because only fewer purchases and sales of securities would take place. Value Funds: Value Funds try to seek out fundamentally sound companies whose shares are currently under-prices in the market. Value Funds will add only those shares to their portfolios that are selling at low price-earnings ratios, low market to book value ratios and are undervalued by other yardsticks. Fund concentrate on future growth prospect having good potential. Debt Funds: These schemes, also commonly called income schemes, invest in debt securities such as corporate bonds, debentures and government securities. The main features of the income fund are:

a. The investor is assured of regular income at periodic levels, say halfyearly or yearly and so on. b. The main objective of this scheme is to declare regular dividends and not capital appreciation. c. The pattern of investment is oriented towards high and fixed income yielding securities like debentures, bonds etc., d. This is best suited to the old and retired people who may not have any regular income. e. It concerns itself with short gain only.

Debt funds can be further classified into: 22

Diversified Debt Funds: A debt fund that invests in all available types of debt securities, issued by entities across all industries and sectors is a properly diversified debt fund. A diversified debt fund is less risky than a narrow-focus fund that invests in debt securities of a particular sector or industry. Focused Debt Funds: Some debt funds have a narrow focus, with less diversification in its investment. Examples include sector, specialized and offshore debt funds. Other examples of focused funds include those that invest only in Corporate Debentures and Bonds or only in Tax Free Infrastructure or Municipal Bonds. High yield Debt Funds: There are funds, which seek to obtain higher interest rates by investing in debt instruments that are considered below investment grade. e.g. Junk Bond Funds. Fixed Term Plan Series Another Indian Variant: These are essentially closed-end. These plans do not generally offer guaranteed returns. This scheme is for short-term investors who otherwise place money as fixed term bank deposits or inter corporate bonds. Hybrid Funds: This is otherwise called income-cum-growth fund. It is nothing but a combination of both income and growth funds. It aims at distributing regular income as well as capital appreciation. This is achieved by balancing the investments between the high growth equity shares and fixed income earning securities in the proportion indicated in the offer document. On The Basis Of Load: Load Fund: Load fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will 23

be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund, which are more important. Efficient funds may give higher returns in spite of loads. No load fund: Fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units. Selection of Asset Mix: Based on your objectives and constraints, you have to specify your asset allocation, that is, you have to decide how much of your portfolio has to be invested in each of the following asset categories: Cash Bonds Stocks Real Estate Precious Metals Others

The thrust of your discussion will be on determining the appropriate mix of bonds and stocks in the portfolio. Before we examine this issue, note the following: The first important investment decision for most individuals is concerned with their education meant to build their human capital. The most significant asset that people generally have during their early working years is their earning power that steams from their human capital. Purchase of life and disability insurance becomes a pressing need to hedge against loss of income on account of death or disability. 24

The first major economic asset that individuals plan to invest in their own house. Before they are ready to buy the house, their savings are likely to be in the form of bank deposits and money market mutual fund schemes. Referred to broadly as cash, these instruments have appeal because they are safe and liquid.

Once the investment in the house is made and reasonable liquidity in the form of cash is maintained to meet expected and unexpected expenses in the short run, the focus shifts to planning for the education of children, providing financial security to the family, saving for retirement, bequeathing wealth to heirs, and contributing to charitable activities.

Formulation of Portfolio Strategy: After you have choosen a certain asset mix, you have to formulate an appropriate portfolio strategy. Two broad choices are available this respect, an active portfolio strategy or a passive portfolio strategy.

Active portfolio strategy It is followed by most of the investment professionals and aggressive investors who strive to earn superior returns, after adjustment for risk, the 4 principal vectors of an active strategy is Market timing Sector rotation Security selection Use of specialized concept

Market timing: This involves departing from the normal asset mix to reflect ones assessment of the prospects of various assets in the near future. Suppose your investible sources for financial assets are 100 and your normal stock-bond mix is 50:50. In the short and intermediate run however you may be inclined to deviate from your long-term asset mix. If you expect stocks to out-perform bonds, on a risk adjusted basis, in the 25

near future, you may perhaps step up the stock component of your portfolio to say 60% or 70%, such an action, of course, would raise the beta of your portfolio. Sector rotation: It can be applied to stock as well as bonds. It is, however, used more commonly with respect to the stock component of the portfolio where it essentially involves the shifting the weightings for various industrial sectors based on their assessed outlook. With respect to bonds, sector rotation implies a shift in the composition of the bond portfolio in terms of quality, coupon rate, and term to maturity, and so on.

Security selection: perhaps the most commonly used vector by those who follow an active portfolio strategy, security selection involves a search for under-priced securities. If you resort to active stock selection, you may employ fundamental or technical analysis to identify stocks which seems to promise superior returns and concentrate the stock component of your portfolio on them. Put differently, in your portfolio such stocks will be over weighted relative to their position in the market portfolio. Likewise, stocks which are perceived to be unattractive will be underweighted relative to their position in the market portfolio Use of Specialized investment concept: This approach is to achieve superior returns is to employ a specialized concept or philosophy, particularly with respect to investment in stocks. As Charles D Ellis put it, a possible way to enhance returns is to develop a profound and valid insight into the forces that drive a particularly exploit that investment insight or concept. Passive portfolio strategy The active strategy is based on the premise that the capital market is charecterised by inefficiencies which can be exploited by resorting to market timing or sector rotation or security location or use of a specialized concept or some combination of these vectors. The passive strategy, on 26

the other hand, rests on the tenet that the capital market is fairly efficient with respect to the available information. Hence, the search for superior returns through an active strategy is considered futile. Selection of Securities: Selection of Bonds (Fixed Income Avenues) You should carefully evaluate the following factors in selecting fixed income avenues. Yield to Maturity: for a fixed income avenue represents the rate return earned by the investor if he invests in the fixed income avenue and holds it till its maturity. Risk of default: To assess the risk of default on a bond, you may look at the credit rating of the bond. If no credit rating is available, examine relevant financial ratios of the firm and assess the general prospects of the industry to which the firm belongs. Tax Shield: In yesteryears, several fixed income avenues offered tax shield; now very few do so Liquidity: if the fixed income avenue can be converted wholly or substantially into cash at a fairly short notice, it possesses liquidity of high order. Selection of Stocks (Equity Shares) Three broad approaches are employed for the selection of equity shares: technical analysis, fundamental analysis, and random selection. Technical analysis looks at price behaviour and volume data to determine whether the share will move up or down or remain trendless. Fundamental analysis focuses on fundamental factors like the earnings level, growth prospects, and risk exposure to establish the intrinsic value of a share. The recommendation to buy, hold, or sell is based on a comparison of the intrinsic value and the prevailing market value and the prevailing market price. The 27

random selection approach is based on the premise that the market is efficient and securities are properly priced.

Portfolio Execution: By the time this phase of portfolio management is reached, several key issues have been sorted out. Investment objectives and constraints have been specified, asset mix has been chosen, portfolio strategy has been developed, and specific securities to be included in the portfolio have been identified. The next step is to implement the portfolio plan by buying or selling specified securities in given amounts. This is the phase of portfolio execution which is often glossed over in portfolio management literature. However, it is an important practical step that has a significant bearing on investment results. Further, it is neither simple nor costless as is sometimes naively felt. For effectively handling the portfolio execution phase, you should understand what the trading game like, what the is the nature of key players in this game, who are likely winners and loosers in this game, and what guidelines should be borne in mind while trading.

Performance Evaluation: Rate of Return The rate of return from a portfolio for a given period (which may be defined as a period of 1yr) is measured as follows: Rate of return = Dividend income + Terminal value Initial value Initial value Risk: The risk of a portfolio can be measured in various ways. The two most commonly used measures of risk are: variability and beta.

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Variability: the Bank Administration Institute of the US recommended the use of variability of the quarterly rates of return of the portfolio. Sharpe and others have also advocated the use of variability. However, their preferred measure of variability is standard deviation. Standard Deviation = (Particular Period Fund Return - Average Fund Return)2 Number of Returns Beta: A measure of risk commonly advocated is beta. The beta of a portfolio is computed the way the beta of an individual security is computed. To calculate the beta of a portfolio, regress the rate of return of the portfolio on the rate of return of a market index. The slope of this regression line is the portfolio beta. Remember that it reflects the systematic risk of the portfolio. Beta = Cov (Fund Return, Market Return)/ Variance of Market Retur Performance Measure: For evaluating the performance of a portfolio it is necessary to consider both risk and return. This the Treynor measure, the Sharpe measure the two popularly employed portfolio performance measures precisely do. Treynor Measure: According to Jack Treynor, systematic risk or beta is the appropriate measure of risk, as suggested by the capital asset pricing model. The Treynor measure of portfolio of performance relates the excess return on a portfolio to the portfolio beta. Treynor measure = Avg rate of return on portfolio Avg rate of return on a risk- free investment Beta of portfolio

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Sharpe Measure: The Sharpe measure is similar to the Treynor measure except that it employs standard deviation, not beta, as the measure of risk. Thus, Sharpe measure = Avg rate of return on portfolio Avg rate of return on a risk-free investment Standard deviation of portfolio Hence the Sharpe measure reflects the excess return earned on a portfolio per unit of its total risk (standard deviation) Note: Both the measures, the Treynor measure as well as the Sharpe measure, postulate a linear relationship between risk and return though they employ different measures of risk. For a perfectly diversified portfolio both the measures give identical rankings because in such cases the total risk and systematic risk are the same.

CHAPTER-II

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Establishment and network: Share khan is an 84 year old company and has its link to SSKI. Share Khan started as a retail arm of SSKI and slowly developed into a large organization having 704 share shops in 280 cities across the country. It has about 31,000 employees with a customer base of more than 5, 00,000. Share khan deals with wide variety of products namely equities, derivatives, commodities, IPO, mutual fund, research, portfolio management and other structured products. The mission of Share khan is to educate and empower the individual investor to make better investment decision through Quality Advice, Innovative products and superior service. It offers both offline and online services. It had launched its website www. Sharekhan.com in the year 2000 and now within a timeframe of 8 years almost 50% of the total services are given online to its customers. It is one of the most preferred website by all the customers as it provides a whole 31

range of in depth research reports on top companies and commodities. All the information pertaining to any financial product is easily available on the companys website. Sharekhan Indias leading stock broker is the retail arm of SSKI, an organization with over many years of experiences in the stock market with more than 132 branches in many cities and the head office of Sharekhan Ltd is in Mumbai for more information online trading destination www.sharekhan.com. Sharekhan offers the trade execution facilities for cash as well as derivatives, on BSE and NSE depository services, commodities trading on the MCX (multi commodity exchange of India Ltd) and NCDEX (national commodity and derivative exchange) and most importantly, investment advice tempered by broking experience. Sharekhan provides the facility to trade in commodities wholly owned subsidiary of its parent SSKI. Sharekhan is the member of two major commodity exchanges MCX and NCDEX. SSKI is a part of Sharekhan, the SSKI group also comprises of institutional broking and corporate finance. The institutional broking division caters to domestic and foreign institutional investors, while the corporate finance division focuses on niche areas such as infrastructure, telecom and media. SSKI owns 56% in Sharekhan and the balance ownership is Citi Group, SSKI has been voted as the domestic brokerage house in the research category, twice by Euro money and four times by Asia money survey. Operations: Share Khan offers three modes of trade transaction means. They are Share shops A customer can directly visit any of the share shop to trade . Online trading A customer can trade on his own by using the online trading mode. Dial & trade A customer can ring up to any dealer or the relationship manager and can execute his trade. Thus, based on the

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convenience of the customer he can choose any of the above modes of transaction. Services: Share Khan also offers different range of services depending on the profile of the customer. All the services are offered with the help of the exclusive research team consisting of 25 analysts in fundamental, technical and derivatives research team. These services are

First step This service is for those customers who are investing for the first time.

Classic This service is for customers who transact occasionally. Speed trade This service is for those customers who are very are day traders and participate actively in the market.

Platinum Circle This service is exclusively for HNIs who are looking for personalized and exclusive investment and portfolio management services ( PMS).It provides continuous educational programs to guide their customers by means of seminars and workshops or by means of booklets and reports. Customer care is the top priority for Share Khan.

Awards and recognition for Share khan: It is being rated among the top twenty wired companies along with Reliance, HLL, and Infosys etc by business today. It is awarded as one of the most preferred broker in India by the Awaaz Consumer Awards STRUCTURE OF THE INDUSTRY: There are many entities involved and the diagram below illustrates the organizational set up of a mutual fund:

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Unit Holders They are the investors who invest in the mutual funds. They delegate the role of investing and monitoring the portfolio to the mutual fund. The unit holders can be further classified into:

Institutional investor: They have qualified treasury personnel to look at investment option. They also have access to professional advice from investment bankers. This class of investors understands the risk reward relationship and can take informed decisions. High net-worth individuals (HNI): These persons are savvy investors and have access to professional advice. They are able to understand the product features and can take an informed view about investing in mutual fund products. Retail savers: 34

This class of investors has been traditionally investing in fixed deposits mainly of banks. They have a certain mind set which need to be changed. A mutual fund need to essentially focus on this segment because this is huge base and has a potential to grow. Sponsor: Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund. The sponsor is the promoter of the mutual fund. It is the sponsor who establishes and registers the mutual fund with the regulator, namely SEBI. The sponsor also appoints the trustees, custodians and the AMC with the prior approval of SEBI, and in accordance with the SEBI regulations. Sponsor must contribute at least 40% of the net worth of the Investment Managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996. Sponsor, or any one of its directors, or the principal officer to be employed by the mutual fund should not be guilty of fraud or convicted of an offensive involving moral turpitude or found guilty of economic offence.

Trustees: Mutual fund shall be constituted in the form of a trust and the instrument of trust shall be in the form of a deed, duly registered under the provisions of the Indian Registration Act, 1908 (16 of 1908) executed by the sponsor in favour of the trustees. Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). Contents of trust deed: The trust deed shall contain such clauses as are mentioned in the Third Schedule and such other clauses, safeguarding the 35 which are necessary for

interests of the unit holders. No trust deed shall contain a clause, which has the effect of Limiting or extinguishing the obligations and liabilities of the trust in relation to any mutual fund or the unit holders. Indemnifying the trustees or the asset management company for loss or damage caused to the unit holders by their acts of negligence or acts of commissions or omissions. Rights and obligations of the trustees: The trustees shall have a right to obtain from the asset management company such information as is considered necessary by the trustees. The trustees shall ensure before the launch of any scheme that the asset management company has Systems are in place for its back office, dealing room and accounting. Appointed all key personnel including fund manager(s) for the scheme(s) and submitted their bio-data, which shall contain the educational qualifications, past experience in the securities market with the trustees, within 15 days of their appointment. Appointed auditors to audit its accounts The trustees shall ensure that an asset management company has been diligent in empanelling the brokers, in monitoring securities transactions with brokers and avoiding undue concentration of business with any broker. The trustees shall ensure that the asset management company has not given any undue or unfair advantage to any associates or dealt with any of the associates of the asset management company in any manner detrimental to interest of the unit holders. 36

The trustees shall ensure that the transactions entered into by the asset management company are in accordance with these regulations and the scheme.

The trustees shall ensure that the asset management company has been managing the mutual fund schemes independently of other activities and have taken adequate steps to ensure that the interest of investors of one scheme are not being compromised with those of any other scheme or of other activities of the asset management company.

The trustees shall take steps to ensure that the transactions of the mutual fund are in accordance with the provisions of the trust deed. The trustees shall be responsible for the calculation of any income due to be paid to the mutual fund and also of any income received in the mutual fund for the holders of the units of any scheme in accordance with these regulations and the trust deed.

The trustees shall quarterly review all transactions carried out between the mutual funds, Asset Management Company and its associates. The trustees shall periodically review the investor complaints received and the redress the same, by the asset management company.

The trustees shall furnish to the Board on a half yearly basis A report on the activities of the mutual fund. A certificate stating that the trustees have satisfied themselves that there have been no instances of self dealing or front running by any of the trustees, directors and key personnel of the asset management company. 37

Trustees shall exercise due diligence as under: The Trustees shall be discerning in the appointment of the directors on the Board of the asset management company. Trustees shall review the desirability of continuance of the asset management company if substantial irregularities are observed in any of the schemes and shall not allow the asset management company to float new schemes. The trustee shall ensure that the trust property is properly protected, held and administered by proper persons and by a proper number of such persons. The trustee shall ensure that all service providers are holding appropriate registrations from the Board or concerned regulatory authority. The trustees shall arrange for test checks of service contracts. Trustees shall immediately report to Board of any special developments in the mutual fund. Obtain internal audit reports at regular intervals from independent auditors appointed by the Trustees. Obtain compliance certificates at regular intervals from the asset management company.

AMC: Asset Management Company (AMC) means a company formed and registered under the Companies Act, 1956 (1 of 1956) and approved as such by the Board. AMCs manage the investment portfolios of schemes.

Restrictions on business activities of the asset management company: The asset management company shall:

Not act as a trustee of any mutual fund. 38

Not invest in any of its schemes unless full disclosure of its intention to invest has been made in the offer documents

Obligations of AMC: The asset management company shall take all reasonable steps and exercise due diligence to ensure that the investment of funds pertaining to any scheme is not contrary to the provisions of these regulations and the trust deed. The asset management company shall exercise due diligence and care in all its investment decisions as would be exercised by other persons engaged in the same business. The asset management company shall be responsible for the acts of commissions or omissions by its employees or the persons whose services have been procured by the asset management company. The asset management company shall submit to the trustees quarterly reports of each year on its activities and the compliance with these regulations. In case the asset management company enters into any securities transactions with any of its associates a report to that effect shall be sent to the trustees. Detailed bio-data of all its directors along with their interest in other companies within fifteen days of their appointment Any change in the interests of directors every six months. The asset management company shall not appoint any person as key personnel who have been found guilty of any economic offence or involved in violation of securities laws. 39

The asset management company shall appoint registrars and share transfer agents who are registered with the Board.

Custodian A person who has been granted a certificate of registration to carry on the business of custodian of securities under the Securities and Exchange Board of India (Custodian of Securities) Regulations, 1996; can act as a custodian or depository. The custodian maintains custody of the securities in which the scheme invests. Appointment of custodian: The Trustee shall appoint a custodian to carry out the custodial services for the schemes of the fund and send intimation of the same to the Board within fifteen days of the appointment of the custodian. No custodian in which the sponsor or its associates hold 50% or more of the voting rights of the share capital of the custodian or where 50% or more of the directors of the custodian represent the interest of the sponsor or its associates shall act as custodian for a mutual fund constituted by the same sponsor or any of its associate or subsidiary company. Agreement with custodian: The AMC shall enter into a custodian agreement with the custodian, which shall contain the clauses, which are necessary for the efficient and orderly conduct of the affairs of the custodian.

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Transfer agent: The AMC if so authorized by the Investment Management Agreement appoints the Registrar and Transfer Agent to the Mutual Fund. The Registrar processes the application form; redemption requests and dispatches account statements to the unit holders. The Registrar and Transfer agent also handles communications with investors and updates investor records. SEBI: SEBI (Securities Exchange Board of India) is the regulator, which looks into the functioning of the industry. Its main role is to ensure that everything is being functioned under the legal framework and there are no discrepancies occurring. REGULATORY NORMS SEBI and RBI are the regulators of the Indian mutual fund industry. AMFI provides the guidelines and act as an interface between the regulators and the industry at large. However, AMFI is not a regulator on its own. Registration of a mutual fund The sponsor shall make an application for registration of a mutual fund to the Board in Form A. Every application for registration shall be accompanied by nonrefundable application fee as specified in the Second Schedule. An application, which is not complete in all respects, shall be liable to be rejected. Before rejecting any such application, the applicant shall be given an opportunity to complete such formalities within such time as may be specified by the Board.

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Eligibility criteria For the purpose of grant of a certificate of registration, the applicant has to fulfill the following, namely: The sponsor should have a sound track record and general reputation of fairness and integrity in all his business transactions. For the purposes of this clause "sound track record" shall mean the sponsor should, Be carrying on business in financial services for a period of not less than five years; and

The net worth is positive in all the immediately preceding five years;

The sponsor has profits after providing for depreciation, interest and tax in three out of the immediately preceding five years, including the fifth year.

The sponsor has contributed or contributes at least 40% to the networth of the asset management company. The sponsor or any of its directors or the principal officer to be employed by the mutual fund should not have been guilty of fraud or has not been convicted of an offense involving moral turpitude or has not been found guilty of any economic offence. Grant of certificate of registration The Board may register the mutual fund and grant a certificate in Form B on the applicant paying the registration fee as specified in Second Schedule.

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Payment of service fee A mutual fund shall pay before the 15th April each year a service fee as specified in the Second Schedule for every financial year from the year following the year of registration. Provided that the Board may, on being satisfied with the reasons for the delay permit the mutual fund to pay the service fee at any time before the expiry of two months from the commencement of the financial year to which such fee relates. Failure to pay service fee The Board may not permit a mutual fund that has not paid service fee to launch any scheme. Procedure for launching of schemes The asset management company shall launch no scheme unless the trustees approve such scheme and a copy of the offer document has been filed with the Board. Every mutual fund shall along with the offer document of each scheme pay filing fees as specified in the Second Schedule.

Disclosures in the offer document The offer document shall contain disclosures, which are adequate in order to enable the investors to make informed investment decision The Board may in the interest of investors require the asset management company to carry out such modifications in the offer document as it deems fit. In case no modifications are suggested by the Board in the offer document 43

within 21 working days from the date of filing, the asset management company may issue the offer document Nomination The asset management company shall provide an option to the unit holder to nominate, in the manner specified in Fourth Schedule, a person in whom the units held by him shall vest in the event of his death. Where more than one person holds the units jointly, the joint unit holders may together nominate a person in whom all the rights in the units shall vest in the event of death of all the joint unit holders. Advertisement material Advertisements in respect of every scheme shall be in conformity with the Advertisement Code as specified in the Sixth Schedule and shall be submitted to the Board within 7 days from the date of issue. The advertisement for each scheme shall disclose investment objective for each scheme. Misleading statements The offer document and advertisement materials shall not be misleading or contain any statement or opinion, which are incorrect or false. Listing of close ended schemes Every close-ended scheme shall be listed in a recognized stock exchange within six months from the closure of the subscription. Listing of close-ended scheme shall not be mandatory, provided If the said scheme provides for periodic repurchase facility to the entire unit holders with restriction, if any, on the extent of such repurchase. If the said scheme provides for monthly income or caters to special classes of persons like senior citizens, women, children, widows or physically handicapped or any special class of persons providing for repurchase of units at regular interval. If the details of such repurchase 44

facility are clearly disclosed in the offer document. If the said scheme opens for repurchase within a period of six months from the closure of subscription. Repurchase of close-ended schemes The asset management company may at its option repurchase or reissue the Repurchased units of a close-ended scheme. The units of close-ended schemes may be open for sale or redemption at fixed predetermined intervals if the maximum and minimum amounts of sale or redemption of the units and the periodicity of such sale or redemption have been disclosed in the offer document. The units of close-ended scheme may be converted into open-ended scheme, If the offer document of such scheme discloses the option and the period of such conversion. The unit holders are provided with an option to redeem their units in full. A close-ended scheme shall be fully redeemed at the end of the maturity period. Offering Period No scheme of a mutual fund other than the new fund offer (NFO) of an equity linked savings schemes shall be open for initial subscription for more than 45 days. Allotment of Units and refund of money The asset management company document, The minimum subscription amount it seeks to raise under the scheme; and In case of over subscription the extent of subscription it may retain. shall specify in the offer

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 The mutual fund and asset management company shall be liable to refund the application money to the applicants, If the mutual fund fails to receive the minimum subscription amount. If the money received from the applicants for units are in excess of subscription. Any amount refundable shall be refunded within a period of six weeks from the date of closure of subscription list, by Registered A.D and by cheque or demand draft marked A/C Payee to the applicants. In the event of failure to refund the amounts within the period specified, the asset management company shall be liable to pay interest to the applicants at a rate of fifteen percent per annum on the expiry of six weeks from the date of closure of the subscription list.

Unit certificates or statement of accounts The asset management company shall issue to the applicant whose application has been accepted, unit certificates or a statement of accounts specifying the number of units allotted to the applicant as soon as possible but not later than six weeks from the date of closure of the initial subscription list and or from the date of receipt of the request from the unit holders in any open ended scheme. Transfer of units A unit certificate unless otherwise restricted or prohibited under the scheme, shall be freely transferable by act of parties or by operation of law. The asset management company shall, on production of instrument of transfer together with relevant unit certificates, register the transfer and return the unit certificate to the transferee within thirty days from the date of such production. Guaranteed returns 46

No guaranteed return shall be provided in a scheme, Unless such returns are fully guaranteed by the sponsor or the asset management company; Unless a statement indicating the name of the person who will guarantee the return, is made in the offer document; The manner in which the guarantee to be met has been stated in the offer document. Winding up A close-ended scheme shall be wound up on the expiry of duration fixed in the scheme on the redemption of the units unless it is rolled-over for a further period. A scheme of a mutual fund may be wound up, after repaying the amount due to the unit holders, On the happening of any event which, in the opinion of the trustees, requires the scheme to be wound up; or If seventy five per cent of the unit holders of a scheme pass a resolution that the scheme be wound up; or If the Board so directs in the interest of the unit-holders.

Where a scheme is to be wound up, the trustees shall give notice disclosing the circumstances leading to the winding up of the scheme: To the Board; and

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In two daily newspapers having circulation all over India, a vernacular newspaper circulating at the place where the mutual fund is formed.

Effect of winding up On and from the date of the publication of notice, the asset management company, shall Cease to carry on any business activities in respect of the scheme so wound up. Cease to issue or redeem units in the scheme.

Procedure and manner of winding up The trustee shall call a meeting of the unit holders to approve by simple majority of the unit holders present and voting at the meeting resolution for authorizing the trustees or any other person to take steps for winding upof the scheme. The trustee or the person authorized shall dispose of the assets of the scheme concerned in the best interest of the unit holders of that scheme. The proceeds of sale realized, shall be first utilized towards discharge of such liabilities as are due and payable under the scheme and after making appropriate provision for meeting the expenses connected with such winding up, the balance shall be paid to the unit holders in proportion to their respective interest in the assets of the scheme as on the date when the decision for winding up was taken.

On the completion of the winding up, the trustee shall forward to the Board and the unit holders a report on the winding up 48

containing particulars such as circumstances leading to the winding up, the steps taken for disposal of assets of the fund before winding up, expenses of the fund for winding up, net assets available for distribution to the unit holders and a certificate from the auditors of the fund. Computation of Net Asset Value Every mutual fund shall compute the Net Asset Value of each scheme by dividing the net assets of the scheme by the number of units outstanding on the valuation date. The Net Asset Value of the scheme shall be calculated and published at least in two daily newspapers at intervals of not exceeding one week. While determining the prices of the units, the mutual fund shall ensure that the repurchase price is not lower than 93% of the Net Asset Value and the sale price is not higher than 107% of the Net Asset Value. General Obligations Every asset management company for each scheme shall keep and maintain proper books of accounts, records and documents, for each scheme so as to explain its transactions and to disclose at any point of time the financial position of each scheme and in particular give a true and fair view of the state of affairs of the fund. Every asset management company shall maintain and preserve for a period of eight years its books of accounts, records and documents.

Limitation on Fees and Expenses on Issue of Schemes All expenses should be clearly identified and appropriated in the individual schemes, namely: Initial expenses of launching schemes. 49

 Recurring expenses including: Marketing and selling expenses including agents' commission. Brokerage and transaction cost. Registrar services for transfer of units sold or redeemed. Fees and expenses of trustees. Audit fees. Custodian fees. Costs related to investor communication. Costs of fund transfer from location to location. Cost of providing account statements and dividend or redemption cheque and warrant. Insurance premium paid by the fund; Winding up costs for terminating a fund or a scheme. Costs of statutory advertisements; Such other costs as may be approved by the Board.

Dispatch of warrants and proceeds Every mutual fund and asset management company shall: Dispatch to the unit holders the dividend warrants within 30 days of the declaration of the dividend. Dispatch the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase. In the event of failure to dispatch the redemption or repurchase proceeds within the period specified, the asset management company shall be liable to pay interest to the unit holders at such rate as may be specified by Board for the period of such delay. Annual Report 50

Every asset management company shall prepare in respect of each financial year an annual report and annual statement of accounts of the schemes and the fund. Auditor's Report Every mutual fund shall have the annual statement of accounts audited by an auditor who is not in any way associated with the auditor of the asset management company. The trustees shall appoint an auditor. The auditor shall forward his report to the trustees and such report shall form part of the Annual Report of the mutual fund. The auditor's report shall comprise of the following: A certificate to the effect that: of his knowledge and belief were necessary for the purpose of

He has obtained all information and explanations, which to the best the audit. The balance sheet and the revenue account give a fair and true view of the scheme; state of affairs and surplus or deficit in the Fund for the accounting period. The statement of account has been prepared in accordance with accounting policies and standards. The scheme wise Annual Report of a mutual fund thereof shall be mailed to all unit holders and Board as soon as may be possible but not later than six months from the date of closure of the relevant accounts year. An asset management company shall before the expiry of one month from the close of each half year that is on 31st March and on 30th September, publish its un-audited financial results in one English daily newspaper circulating in the whole of India and in a newspaper published in the language of the region where the Head Office of the mutual fund is situated. 51

Inspection and audit The Board may appoint one or more persons as inspecting officer to undertake the inspection of the books of accounts, records, documents and infrastructure, systems and procedures or to investigate the affairs of an asset management company for any of the following purposes, namely: To ensure that the asset management company is maintaining the books of accounts in the manner specified in these regulations. To ascertain whether the asset management company is complying with the provisions of the Act and the regulations. To ascertain whether the systems, procedures and safeguards followed by the mutual fund are adequate. To investigate into the complaints received from the investors or any other person on any matter having a bearing on the activities of the asset management company. To suo-moto ensure that the affairs of the asset management company are being conducted in a manner, which are in the interest of the investors or the securities market. Notice before inspection and investigation Before ordering an inspection or investigation the Board shall give at least ten days notice to the asset management company. If the Board is satisfied that in the interest of the investors no such notice should be given, it may, by an order in writing direct that such inspection or investigation be taken up without such notice. 52

Obligations on inspection and investigation It shall be the duty of the asset management company whose affairs are being inspected or investigated, and of every director, officer and employee thereof, to produce to the inspecting officer such books, accounts, records, and any documents in its custody or control and furnish him such statements and information relating to the activities, as the inspecting officer may require, within such reasonable period as the inspecting officer may specify. Action on inspection or investigation report The Board or the Chairman shall after consideration of inspection or investigation report take such action as the Board or chairman may deem fit.

Appointment of Auditor The Board has the power to appoint an auditor to inspect or investigate into the books of accounts or the affairs of the asset management company. Payment of inspection fees to the Board The Board shall be entitled to recover such expenses including fees paid to the auditors as may be incurred by it for the purposes of inspecting the books of accounts, records and documents of the asset management company. Procedure for action in case of default Liability for action in case of default: A mutual fund which

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 Contravenes any of the provisions of the Act and its regulations, Fails to furnish any information or furnishes wrong information relating to its activity as a mutual fund as required under the regulations; Fails to submit periodical returns as required under the regulations; Does not co-operate in any inquiry or inspection conducted by the Board; Fails to comply with any directions of the Board issued under the provisions of the Act or the regulations; Fails to resolve the complaints of the investors or fails to give a satisfactory reply to the Board in this behalf; Indulges in unfair trade practices in securities like: Is guilty of misconduct or improper or unprofessional conduct. Fails to pay fees. Violates the conditions of registration Asset Management Company does not carry out its obligations

Action against intermediaries: The Board may initiate action for suspension or cancellation of registration of an intermediary holding a certificate of registration who fails to exercise due diligence or to comply with the obligations. Cancellation of certificate. The Board may cancel the certificate of registration granted to a mutual fund, if such mutual fund: Is guilty of fraud, or has been convicted of an economic offence.

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Has been guilty of repeated defaults of the nature specified in regulation. The AMC indulges in price manipulation or price rigging or cornering activities affecting the securities market and the investors interest. The financial position of the mutual fund deteriorates to such an extent that the Board is of the opinion that its continuance is not in the interest of unit holders and other mutual funds.

Manner of making order of cancellation or suspension No order of suspension or cancellation of certificate or the approval, as the case may be, shall be made by the Board against an AMC except after holding an enquiry.

Manner of holding enquiry before suspension or cancellation For the purpose of holding an enquiry, the Board may appoint one or more enquiry officers. The enquiry officer shall issue to the AMC, at its registered office or the principal place of its business, a notice stating out the grounds on which action is proposed to be taken against it and calling upon it to show cause against such action within a period of fourteen days from the date of receipt of the notice. The AMC shall within fourteen days of the date of receipt of such notice, furnish to the enquiry officer a written reply, together with copies of documentary or other evidence relied on by it. The enquiry officer shall give a reasonable opportunity of hearing to the AMC, to enable it to make submissions in support of its reply. 55

 Before the enquiry officer, the asset management company may appear through any person duly authorized by it. Provided that no lawyer or advocate shall be permitted to represent the asset management company at the enquiry. The enquiry officer shall, after taking into account all relevant facts and submissions made by the asset management company submit a report to the Board and recommend the action, if any, to be taken against the asset management company as also the grounds on which the penal action is justified. Show cause notice and order. On receipt of the report from the enquiry officer, the Board shall consider the same and issue to the asset management company, a show-cause notice. The AMC, shall within fourteen days of the date of the receipt of the show cause notice, send a reply to the Board. The Board after considering the reply of the asset management company, if any, shall as soon as possible pass such order as it deems fit and send to it.

Effect of suspension or cancellation of certificate of registration On and from the date of the suspension of the certificate of registration, the AMC, shall cease to carry on any activity as a mutual fund, during the period of suspension, and shall be subject to the directions of the Board with regard to any records, documents, or securities that may be in its custody or control, relating to its activities as asset management company. On and from the date of cancellation of the certificate of registration, the asset management company shall with immediate 56

effect, cease to carry on any activity as an asset management company. The Board may in order to protect the interest of the unit holders order the transfer of records, document, securities, etc. to any person specifically appointed for the purpose or to any other trustee or asset management company. Publication of order of suspension or cancellation The Board in two newspapers may publish the order of suspension or cancellation passed ETHICS IN THE MUTUAL FUND INDUSTRY Role of AMFI Association of Mutual Funds of India (AMFI) was incorporated on August 22nd, 1995 as a non-profit organization. It set up a number of committees to enhance the industry standards, to match international levels. The main of objectives of AMFI are: To define and maintain high professionals and ethical standards in all areas of operation of mutual fund industry. To interact with SEBI, RBI and the government on all matters concerning the mutual fund industry. To develop a cadre well trained agent distributors and to implement the Programme of training and certification for all intermediaries. To undertake nationwide investors awareness programme, so as to promote proper understanding of the concept and working of mutual funds. To disseminate authentic data on mutual fund industry and to undertake studies and research 57

Code of ethics Ethics are formulated to enhance the standard of corporate governance and to instill professionalism and effectiveness among the various players in an industry. The principals on which this code relies are: Integrity: Members in the conduct of business shall observe high standards of integrity and fairness in all dealings with investors, issuers, and market intermediaries. The schemes should be operated and managed in the interest of unit holders. Due diligence: Members in the conduct of their asset

management business, shall at all times: Render high standards of service. Exercise due diligence. Exercise independent professional judgment.

Disclosures: Members shall ensure timely dissemination to all unit holders about the investment objectives, investment policies, financial position, portfolio details etc, in respect of all schemes.

Professional selling practices: Members shall not use unethical means to induce any potential investor to purchase their schemes. Members shall not make an exaggerated statement regarding performance of any scheme. Members shall endeavor to ensure that all times: investor makes any investment decision. Copies prospectus and related literature is made available to investors on request. 58

Investors are made aware of the risk in schemes, before the

 Adequate steps are taken for fair allotment of units and refund of application money without delay and within the prescribed time limit. Complaints from investors are fairly and expeditiously dealt with. Members in all their communication to investors and selling agents shall: Not create unrealistic expectations. Not guarantee returns except as stated in the offer document of the scheme approved by SEBI, and in such case the members shall ensure that adequate resources will be made available and maintained to meet the guaranteed returns. Not induce investors by offering benefits, which are extraneous to the scheme. Investment practices: Members shall manage all the schemes in accordance with the fundamental solely in the interest of unit holders. Operations: Members shall avoid conflict of interest in managing the affairs of the scheme and shall keep the interest of all unit holders paramount in all matters relating to the scheme. investment objectives and policies stated in the offer document and make investment decision

Members shall not indulge in front running (buying or selling of any securities ahead of transaction of the fund, with access to information regarding the transaction which is not public and which is material to making an investment decision so as to derive unfair advantage).

Members shall not, in respect of any securities be party to: -

Create a false market. Price rigging or manipulation. 59

Members shall not make any change in the fundamental attributes of a scheme, without the prior approval of the unit holders except when such change is consequent on changes in the regulations.

Members shall avoid excessive concentration of business with any broking firm and excessive holding of units in a scheme by few people or entities.

Reporting practices: Members shall follow comparable and standardized valuation policies in accordance with the SEBI mutual fund regulations. Members shall ensure scheme wise segregation of cash and securities accounts. Unfair competition: Members shall not make any statement or become privy to any act, practice or competition, which is likely to be harmful to the interests of other members. Observance of statutes, rules and regulations: Members shall abide by the letter and spirit of the provisions of the statutes, rules and regulations, which may be applicable and relevant to the activities, carried on by the members.

Enforcement: Members shall: Make observance of the code as a condition of employment.

60

Make violations of the provisions of the code, a ground for disciplinary action.

Establish internal controls and compliance mechanisms, including assigning supervisory responsibility.

File regular reports to the trustees on half yearly and annual basis regarding observance of the code.

Dedicate adequate resources to carry out the provisions of the code.

Factors Affecting NAV: The investors funds are deployed in a portfolio of securities by the fund manger. The value of these investments keeps on changing as market price of the securities change. And the market price changes because of the various factors which have analyzed below so that the organization stays alert when such factors happen again. Calculation of NAV: Since investors are free to enter and exit the fund at any time, it is essential that the market value of their investments is used to determine the price at which such entry and exit will take place. The net assets represent the market value of assets, which belong to the investors, on a given date. Net Assets are calculated as: Market value of investments + Current assets and other assets + accrued income current liabilities and other liabilities accrued expenses Net Asset Value or NAV of a mutual fund is the value of one unit of investment in the fund, in net asset terms. It is computed by dividing the net assets of the fund by the number of units that are outstanding in the books of the fund. NAV = Market Value of Assets Liabilities Units Outstanding 61

For example, consider a mutual fund that collects Rs. 10 crore by issuing units of Rs. 10 each. Therefore when the mutual fund begins operations, it would have 1,00,00,000 units of Rs. 10 each. Let us assume that the portfolios in which these funds are invested are as follows: Equity Shares Government Bonds Corporate Bonds Money Market instruments Total Assets Rs. 4, 50, 00,000 Rs. 3, 00, 00,000 Rs. 1, 50, 00,000 Rs. 1, 00, 00,000 Rs. 10, 00, 00,000

After 30 days, the fund is scheduled to open for fresh sales as well as repurchases. The investors, who come into the fund, will buy new units at a price that represents the value of the underlying portfolio. Similarly, investors who redeem their units will do so at a price that reflects the current value of the portfolio in which they originally invested. Therefore the investment portfolio will have to be valued again, to ascertain what its current value is. In the interim, the mutual fund would have incurred expenses, earned incomes, which also will have to be reflected in the price per unit. We call these charges as accrued expenses. Mutual funds have internal accounting policies that that enable the computation of these accruals. Let us assume that the status of the investments at the end of the 30 days is as follows: Equity shares Government Bonds Corporate Bonds Money Market instruments Total assets Rs. 6, 50, 00,000 Rs. 2, 80, 00,000 Rs. 1, 20, 00,000 Rs. 1, 00, 00,000 Rs. 11, 50, 00,000

The value of the investments has changed with the change in market prices. We call the process of valuing assets by using market prices, as marking to market. Let us assume that the accrued income and expense are Rs. 1, 00,000 and Rs. 1, 35,000 respectively. Let us also assume that 62

the level of current assets and current liabilities were Rs. 4,00,000 and Rs. 3,00,000 respectively. The net assets of the fund can be computed as follows: Market-to-Market value of the investments: Plus current assets Plus accrued income Less current liabilities Less accrued expenses Net assets of the fund 11, 50, 00,000 4, 00,000 1, 00,000 11, 55, 00,000 3, 00,000 1, 35,000 11, 50, 65,000

Since the number of units is 1, 00, 00,000, the net asset value on this date will be Rs. 11.5065. The price at which new investors can buy the units, and existing investors can redeem their units will be based on this number. A fund's NAV may change every day to reflect changes in the value of its portfolio holdings, which in turn respond to changing market conditions. Further, many funds are open-ended, meaning they allow for daily purchases and redemptions, which affects the total number of shares outstanding.

Significant Factors Affecting NAV Macroeconomic Factor: Following are the macroeconomic factors that affect the market price of the securities constituting the portfolio of the mutual fund scheme: Benchmark Index: The performance of any mutual fund scheme is measured relative to market indices. Hence, changes in the market index bear significance. This is especially true for portfolios that have a high degree of correlation with the benchmark. Index is "a statistical measure of the changes in a portfolio of stocks representing a portion of the overall market." Ideally, a change in the price of an index would represent an exactly proportional 63

change in the stocks included in the index. Index reflects the performance of the market. Index reflects both the Macroeconomic factors and the micro economic factors that affect the performance of the NAV. Government Policies: Government Policies like monetary, credit, fiscal etc do have an effect on the capital market and in turn the NAV of the mutual fund scheme. Microeconomic Factors: There are various microeconomic factors that also affect the valuation of the NAV of the mutual fund scheme these have been explained below: 1. Sale and purchase of securities 2. Sale and repurchase of units 3. Valuation of all investment securities held 4. Accrued income and liabilities 5. Benchmark index 6. Portfolio Turnover 7. Dividend 1.Sale and Purchase of Securities: Fund houses buy securities out of the money invested by people. There might be a rise or fall in the price of these securities due to their sale and purchase and accordingly the value of the NAV will be affected. 2.Sale and Repurchase of Units: If the investors redeem their units, the fund managers will also have to sell the securities to pay the amount to the investors. It is possible that they have to sell the securities at a lower price. So the NAV of the scheme will also fall. 3.Valuation Of All Investment Securities Held If the securities held by the mutual fund are traded on stock exchanges regularly, the process of marking to market is simple. The market price of the security is used to value the security. The market price is used to value the security. The last quoted closing price on the stock exchange 64

is principally traded is used for valuation. A thinly traded securities market price may not be representative of its underlying value, as it is not valued frequently in the market. Mutual funds have to use fair valuation methodology for such securities. 4.Accrued Income and Liabilities Accrued income includes any income due to the fund but not received at the time of valuation (for example, dividend announced by a company yet to be received). Accrued Liabilities include expenses payable by the fund, for example custodian fees or even the management fees payable to the AMC. These income and liabilities items have to be accrued and included in the computation of the NAV. 5.Portfolio Turnover: The turnover rate measures how often the investment manager changes the total holdings in a funds portfolio. Higher the Turnover rate more active is the fund and can capitalize on the short-term profits. maximize the return. 6.Dividend: Dividend is issued as a percentage of Face value. The NAV of the scheme varies with changes in the value of the portfolio, and the impact of the proportion of income earned by the fund, to what is actually distributed as dividend. Issue of dividend lowers the NAV as the net assets of the fund are lowered Higher Turnover rate results in higher brokerage and other fees. It describes the timing of the market to

CHAPTER-III
65

Reliance Growth Fund Growth Treasury Bills Returns Returns Date % Returns 31-Jan-11 265.38 28-Feb-11 266.6 31-Mar-11 282.83 29-Jan-10 272.75 28-Feb-10 240.08 31-Mar-10 197.98 30-Jan-09 204 -0.4576144 7.8382 1.814639 -5.738429 7.6985 3.69569 7.2354 6.400475 4.827446 14091 12938 12454 13787 12962 13696 8.9104 3.8835 -9.665 6.3649 -5.362 5.6659 Interest Rate Sensex Returns Index Values % Returns Fund

% Returns

NAV

13.60796 6.9022 -1.311143 21.26477 6.9939 -0.814034 -2.950980 7.0513 9.778615 - 13.16562 66

28-Feb-09 234.93 30-Mar-09 193.43 30-Jan-08 178.2 29-Feb-08 137.65 31-Mar-08 122.18 31-Jan-07 114.36 30-Feb-07 90.4 30-Mar-07 71.06 31-Jan-06 76.92 30-Feb-06 80.04 Average 8.5887580

6.4232 21.45478 6.174 8.54657 5.7912

4.036281 6.610029 2.987623

12962 8634.5 9397.9 8788.8 7892.3 5583.6 6602.7 4795.5 5590.6 4453.2

50.118 -8.124 6.9306 11.359 41.348 -15.43 37.686 -14.22 25.54

29.45877 5.6232 -0.592218 12.66164 5.6567 -1.367021 6.838055 5.7351 6.717404 26.50442 5.3741 15.93856 27.21643 4.6353 4.431578

-7.61830 4.4386 3.033961 -3.89805 4.3079 4.166146

9.666588

Std. Div. : 0.5344 Beta Alpha : 0.88 : 0

Sharpe Ratio: 0.552 Treynor Ratio: 33.1

Fund Scheme Returns over the Period under Study: 67

90 80 70 60 50 40 30 20 10 0 1s Qtr t 2ndQtr 3rdQtr 4thQtr Es at Wes t North

Fund Scheme Returns over the Period under Study has increased

continuously over the period under study. This means that investors are showing trust in this scheme.

Reliance Vision-Growth

Treasury Bills Returns Date Interest % Returns

Sensex Returns Fund Returns % Returns Index % Returns NAV

68

rate 31-Jan- 11 173.52 -1.00410 28-Feb-11 7.8382 175.28 -6.904610 31-Mar-11 7.6985 188.28 0.25559 29-Jan-10 7.2354 187.8 14.41452 28-Feb-10 6.9022 164.14 15.61597 31-Mar-10 6.9939 141.97 0.86678 30-Jan-09 7.0513 140.75 -11.61695 28-Feb-09 6.4232 159.25 23.64130 30-Mar-09 6.174 128.8 10.18906 31-Jan-08 5.7912 116.89 24.94922 29-Feb-08 5.6232 93.55 5.527354 31-Mar-08 5.6567 88.65 5.888676 31-Jan-07 5.7351 83.72 19.48051 28-Feb-07 5.3741 70.07 22.11571 30-Mar-07 4.6353 57.38 -10.85909 31-Jan-06 4.4386 64.37 -7.884945 28-Feb-06 4.3079 69.88 Average 6.54218 4.166146 1.814639 6.400475 4.827446 -1.311143 -0.814034 9.778615 4.036281 6.610029 2.987623 -0.592218 -1.367021 6.717404 15.93856 4.431578 3.033961

values

14091 12938 12454 13787 12962 13696 12962 8634.5 9397.9 8788.8 7892.3 5583.6 6602.7 4795.5 5590.6 4453.2

8.9104 3.8835 -9.665 6.3649 -5.362 5.6659 50.118 -8.124 6.9306 11.359 41.348 -15.43 37.686 -14.22 25.54

9.66658

69

Std. Div. : 0.4070 Beta Alpha : 0.676 : 0.001

Sharpe Ratio : 0.39 Treynor Ratio : 23.5

Fund SchemeReturns Over the Period Under Study:

9 0 8 0 7 0 6 0 5 0 4 0 3 0 2 0 1 0 0 1 Qtr st 2 Qtr nd 3 Qtr rd 4th Qtr East W est N orth

Fund Scheme Returns over the Period under Study as increased

continuously over the period under study. This means that investors are showing trust in this scheme.

70

SBI Magnum Sector Umbrella - Contra - Growth

Treasury Bills Returns Fund Returns Date Interest NAV % Returns rate 30-Jan-11 36.35 -0.38366 28-Feb-11 7.8382 36.49 -7.969735 31-Mar-11 7.6985 39.65 3.416797 31-Jan-10 7.2354 38.34 12.17086 28-Feb-10 6.9022 34.18 16.21897 31-Mar-10 6.9939 29.41 -0.775978 31-Jan-09 7.0513 29.64 -10.1545 28-Feb-09 6.4232 32.99 29.47409 31-Mar-09 6.174 25.48 8.149405 31-Jan-08 5.7912 23.56 30.45404 29-Feb-08 5.6232 18.06 31-Mar-08 31-Jan-07 28-Feb-07 30-Mar-07 31-Jan-06 28-Feb-06 Average 8.06002 5.6567 5.7351 5.3741 4.6353 4.4386 4.3079 1.814639 6.400475 4.827446 -1.311143 -0.814034 9.778615 4.036281 6.610029 2.987623 -0.592218 -1.367021 6.717404 15.93856 4.431578 3.033961 4.166146 % Returns

Sensex Returns Index values % Returns

14091 12938 12454 13787 12962 13696 12962 8634.5 9397.9 8788.8

8.9104 3.8835 -9.665 6.3649 - 5.362 5.6659 50.118 -8.124 6.9306 11.359 41.348 -15.43 37.686 -14.22 25.54 9.66658

7892.3 5583.6 6602.7 4 795.5 5590.6 4453.2

71

Std. Div. : 0.501 Beta Alpha : : 0.833 0.001

Sharpe Ratio : 0.517 Treynor Ratio : 31.1 Fund Scheme Returns Over the Period Under Study:

90 80 70 60 50 40 30 20 10 0 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr East West North

72

Fund Scheme Returns over the Period under Study as increased continuously over the period under study. This gives an idea that fund is performing well.

DSP ML Opportunities Fund Growth Treasury Bills Returns Fund Returns Date % Returns rate 31-Jan-11 53.34 0.018750 28-Feb-11 7.8382 53.33 -7.647018 31-Mar-11 7.6985 57.748 0.43654 31-Jan-10 7.2354 57.49 13.74282 28-Feb-10 6.9022 50.55 14.28894 31-Mar-10 6.9939 44.23 0.385837 30-Jan-09 7.0513 44.06 -10.79165 28-Feb-09 6.4232 49.39 25.00632 31-Mar-09 6.174 39.51 9.38538 31-Jan-08 5.7912 36.12 27.54237 29-Feb-08 5.6232 28.32 5.357142 28-Mar-08 5.6567 26.88 0.8630 31-Jan-07 5.7351 26.65 24.64920 28-Feb-07 5.3741 1.814639 6.40047 4.82744 -1.311143 -0.814034 9.778615 4.036281 6.610029 2.987623 -0.592218 -1.367021 6.717404 15.93856 73 14091 5 12938 6 12454 13787 12962 13696 12962 8634.5 9397.9 8788.8 7892.3 5583.6 6602.7 8.9104 3.8835 -9.665 6.3649 -5.362 5.6659 50.118 -8.124 6.9306 11.359 41.348 -15.43 37.686 values Interest % Returns Sensex Returns Index % Returns NAV

21.38 17.27921 31-Mar-07 4.6353 18.23 -10.3295 31-Jan-06 4.4386 20.33 -0.294261 28-Feb-06 4.3079 20.39 Average 6.86831

4.431578 3.033961

4795.5 5590.6 4453.2

-14.22 25.54

4.166146

9.6665

Std. Div. : 0.427 Beta Alpha : 0.706 : 0.003

Sharpe Ratio : 0.421 Treynor Ratio : 25.4

74

Fund Scheme Returns Over the Period Under Study:

9 0 8 0 7 0 6 0 5 0 4 0 3 0 2 0 1 0 0 1 Qtr st 2nd Qtr 3rd Qtr 4th Qtr East W est N orth

Fund Scheme Returns over the Period under Study decreased initially but afterwards it has increased continuously over the period under study.

75

Prudential ICICI Power Growth Treasury Bills Returns Returns Date % Returns rate 30-Jan-11 79.23 -0.226671 28-Feb-11 7.8382 79.41 -6.78483 31-Mar-11 7.6985 85.19 2.02395 30-Jan-10 7.2354 83.5 12.24626 29-Feb-10 6.9022 74.39 16.16177 31-Mar-10 6.9939 64.04 1.44146 31-Jan-09 7.0513 63.13 -10.73246 29-Feb-09 6.4232 70.72 27.4923 31-Mar-09 6.174 55.47 7.708737 31-Jan-08 5.7912 51.5 27.16049 29-Feb-08 5.6232 40.5 9.135004 31-Mar-08 5.6567 37.11 -1.851362 31-Jan-07 5.7351 37.81 23.96721 28-Feb-07 5.3741 30.5 17.53371 31-Mar-07 4.6353 25.95 -9.487268 31-Jan-06 4.4386 1.814639 6.400475 4.827446 -1.311143 -0.814034 9.778615 4.036281 6.610029 2.987623 -0.592218 -1.367021 6.717404 15.93856 4.431578 3.033961 76 14091 12938 12454 13787 12962 13696 12962 8634.5 9397.9 8788.8 7892.3 5583.6 6602.7 4795.5 5590.6 8.9104 3.8835 -9.665 6.3649 -5.362 5.6659 50.118 -8.124 6.9306 11.359 41.348 -15.43 37.686 -14.22 25.54 value Interest % Returns Sensex Returns Index % Returns Fund NAV

28.67 -6.945796 28-Feb-06 4.3079 30.81 Average 6.802660 4.166146

4453.2 9.666588

Std. Div. : 0.423 Beta Alpha : 0.703 :0

Sharpe Ratio : 0.416 Treynor Ratio : 25

Fund Scheme Returns Over the Period Under Study:

77

9 0 8 0 7 0 6 0 5 0 4 0 3 0 2 0 1 0 0 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr East West N orth

Fund Scheme Returns over the Period under Study has increased continuously over the period under study.

ING Vysya Equity Fund Growth Treasury Bills Returns Returns Date % Returns rate 30-Jan-11 31.36 0.480615 28-Feb-11 7.8382 31.21 -6.640741 31-Mar-11 7.6985 1.814639 6.400475 78 14091 12938 8.9104 3.8835 values Interest % Returns Sensex Returns Index % Returns Fund NAV

33.43 1.610942 29-Jan-10 7.2354 32.9 7.375979 29-Feb-10 6.9022 30.64 16.41337 31-Mar-10 6.9939 26.32 0.11411 30-Jan-09 7.0513 26.29 -11.71927 28-Feb-09 6.4232 29.78 16.37358 30-Mar-09 6.174 25.59 6.669445 30-Jan-08 5.7912 23.99 14.94968 29-Feb-08 5.6232 20.87 9.842105 31-Mar-08 5.6567 19 -0.52356 31-Jan-07 5.7351 19.1 19.7492 30-Feb-07 5.3741 15.95 18.58736 30-Mar-07 4.6353 13.45 -9.79208 31-Jan-06 4.4386 14.91 -6.520376 28-Feb-06 4.3079 15.95 Average 4.810648

4.827446 -1.311143 -0.814034 9.778615 4.036281 6.610029 2.987623 -0.592218 -1.367021 6.717404 15.93856 4.431578 3.033961

12454 13787 12962 13696 12962 8634.5 9397.9 8788.8 7892.3 5583.6 6602.7 4795.5 5590.6 4453.2

-9.665 6.3649 -5.362 5.6659 50.118 -8.124 6.9306 11.359 41.348 -15.43 37.686 -14.22 25.54

4.166146

9.66658

Std. Div. : 0.299 Beta : 0.497 79

Alpha

: 0

Sharpe Ratio : 0.14 Treynor Ratio :8.6 Fund Scheme Returns Over the Period Under Study:

90 80 70 60 50 40 30 20 10 0 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Eas t W est North

Fund Scheme Returns over the Period under Study increased initially but afterwards it has decreased continuously over the period under study. This shows the incapability of the management to win the trust of the investors.

80

HDFC Prudence Fund Growth Treasury Bills Returns Fund Returns Date % Returns rates 31-Jan-11 112.61 -1.21757 28-Feb-11 7.8382 114 - 4.71263 31-Mar-11 7.6985 119.64 2.854293 31-Jan-10 7.2354 116.32 10.23437 29-Feb-10 6.9022 105.52 14.64504 31-Mar-10 6.9939 92.038 1.052932 31-Jan-09 7.0513 91.079 -6.57798 31-Feb-09 6.4232 97.492 11.74765 30-Mar-09 6.174 87.243 9.37641 30-Jan-08 5.7912 79.764 20.6042 29-Feb-08 5.6232 66.137 9.144168 31-Mar-08 5.6567 60.596 2.61812 31-Jan-07 5.7351 59.05 16.83352 28-Feb-07 5.3741 50.542 14.41054 30-Mar-07 4.6353 44.176 -4.70685 31-Jan-06 4.4386 46.358 -1.32607 81 1.814639 6.400475 4.827446 -1.311143 -0.814034 9.778615 4.036281 6.610029 2.987623 -0.592218 -1.367021 6.717404 15.93856 4.431578 3.033961 14091 12938 12454 13787 12962 13696 12962 8634.5 9397.9 8788.8 7892.3 5583.6 6602.7 4795.5 5590.6 8.9104 3.8835 -9.665 6.3649 -5.362 5.6659 50.118 -8.124 6.930 11.359 41.348 -15.43 37.686 -14.22 25.54 values Interest % Returns Sensex Returns Index % Returns NAV

28-Feb-06 46.981 Average 5.936260

4.3079 4.166146

4453.2 9.6665

Std. Div. : 0.369 Beta : 0.6141 Alpha : 0 Sharpe Ratio : 0.319 Treynor Ratio : 19.2

Fund Scheme Returns Over the Period Under Study:

82

90 80 70 60 50 40 30 20 10 0 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr East West N orth

Fund Scheme Returns over the Period under Study has increased continuously over the period under study

UTI - MIS - Advantage Fund Growth

Treasury Bills Returns Returns Date Interest % Returns 83

Sensex Returns Index % Returns

Fund NAV %

Returns rates 31-Jan-11 13.858 0.11342 28-Feb-11 7.8382 13.842 -2.97826 31-Mar-11 7.6985 14.267 1.76906 31-Jan-10 7.2354 14.019 4.32831 29-Feb-10 6.9022 13.437 3.9315 31-Mar-10 6.9939 12.929 0.28233 31-Jan-09 7.0513 12.892 -2.17541 28-Feb-09 6.4232 13.179 5.73986 31-Mar-09 6.174 12.464 2.78916 31-Jan-08 5.7912 12.126 8.096 29-Feb-08 5.6232 11.217 3.1523 31-Mar-08 5.6567 10.875 0.8700 31-Jan-07 5.7351 10.781 4.60706 28-Feb-07 5.3741 10.306 2.17315 31-Mar-07 4.6353 10.087 28-Jan-06 31-Feb-06 Average 2.33564 4.4386 4.3079 1.814639 6.400475 4.827446 -1.311143 -0.814034 9.778615 4.036281 6.610029 2.987623 -0.592218 -1.367021 6.717404 15.93856 4.431578 3.033961 4.166146 14091 12938 12454 13787 12962 13696 12962 8634.5 9397.9 8788.8 7892.3 5583.6 6602.7 4795.5 5590.6 4453.2 8.9104 3.8835 -9.665 6.3649 -5.362 5.6659 50.118 -8.124 6.9306 11.359 41.348 -15.43 37.686 -14.22 25.54 9.66658 values

84

Std. Div. : 0.1453 Beta : 0.241 Alpha : 0 Sharpe Ratio : -0.83 Treynor Ratio : -50.63517735 Fund Scheme Returns Over the Period Under Study:

9 0 8 0 7 0 6 0 5 0 4 0 3 0 2 0 1 0 0 1 Qtr st 2nd Qtr 3 Qtr rd 4th Qtr East W est N orth

Fund Scheme Returns over the Period under Study increased initially but afterwards it has decreased over the period under study.

85

SBI Magnum MIP Growth Treasury Bills Returns Returns Date % Returns rates 30-Jan-11 16.554 0.31146 28-Feb-11 7.8382 16.503 -1.324435 31-Mar-11 7.6985 16.724 0.703305 31-Jan-10 7.2354 16.607 1.285640 29-Feb-10 6.9022 16.397 2.729169 31-Mar-10 6.9939 15.961 0.309836 31-Jan-09 7.0513 15.912 0.641994 28-Feb-09 6.4232 15.81 3.025583 31-Mar-09 6.174 15.346 1.158199 30-Jan-08 5.7912 15.170 3.357565 29-Feb-08 5.6232 14.677 2.935029 31-Mar-08 5.6567 14.259 1.554064 31-Jan-07 5.7351 14.041 2.828392 28-Feb-07 5.3741 13.654 1.735275 30-Mar-07 4.6353 13.422 -1.907546 31-Jan-06 4.4386 13.683 0.631775 28-Feb-06 4.3079 13.597 Average 4.166146 86 1.814639 6.400475 4.827446 -1.311143 -0.814034 9.778615 4.036281 6.610029 2.987623 -0.592218 -1.367021 6.717404 15.93856 4.431578 3.033961 14091 12938 12454 13787 12962 13696 12962 8634.5 9397.9 8788.8 7892.3 5583.6 6602.7 4795.5 5590.6 4453.2 9.66658 8.9104 3.8835 -9.665 6.3649 -5.362 5.6659 50.118 -8.124 6.930 11.359 41.348 -15.43 37.686 -14.22 25.54 values Interest % Returns Sensex Returns Index %Returns Fund NAV

1.248457

Std. Div. :0.77 Beta : 0.129 Alpha : 0 Sharpe Ratio : -2.519 Treynor Ratio: -1.503 Fund Scheme Returns Over the Period Under Study:

90 80 70 60 50 40 30 20 10 0 1s Qtr t 2nd Qtr 3rd Qtr 4th Qtr E t as W t es North

87

Fund Scheme Returns over the Period under Study decreased initially but afterwards it has increased continuously over the period under study. But the overall trend is not of much of a movement.

TABLE FOR IMPORTANT STATISTICS OF ALL MUTUAL FUND SCHEMES: Scheme Std.deviation Beta Alpha Sharpe ratio Reliance growth Reliance vision SBI ContraGrowth 0.501 0.833 0.001 0.517 31.1 0.407 0.676 0.001 0.39 23.5 0.5334 0.888 0 0.552 Treynor ratio 33.1

DSPMLGrowth Prudential ICICIgrowth INGVysyagrowth HDFC Prudencegrowth UTI-MISGrowth SBI Magnum MIP-Growth

0.427

0.706

0.003

0.721

25.4

0.423

0.703

0.416

25

0.299

0.497

0.14

8.6

0.369

0.6141

0.319

19.2

0.1453

0.241

-0.83

-50.6351

0.77

0.129

-2.519

-1.503

88

Analysis Of Above Table Standard Deviation: If an assets return has no variability, it has no risk. An investor analyzing a series of returns on an investment over a period of years need to know about the variability of its returns or in other words the assets total risk. For determining this total risk Standard Deviation is calculated. The fund that has high standard deviation has high variability and thus has high risk and vice versa. Standard Deviation of 3.5 percent and Above per month means High Variability which in turn means High Risk, SD of less than 3.5 percent and greater than and equal to 0.5 percent per month means Moderate Variability so Moderate Risk and SD less than 0.5 percent means Low Variability which in turn means Low Risk. (This rating is as per book on How Mutual Funds Work by Albert J. Fredman and Russ Wiles. and as per the industry experts views.) Here in the above schemes the 1 st and 3rd schemes are very high and above to the 3.5% and are therefore they are very high variability so they are very high risky. Out of these the SBI Contra Growth is the highest and the SBI Magnum is the lowest SD. The other 4 schemes which are in the medium ranges (reliance growth, reliance vision, DSPL Growth, ICICI Prudential) and the rest of them are at the low level ranges. Beta: Beta coefficient is a measure of the non-diversifiable or systematic risk of an asset relative to that of the market portfolio. A beta of 1.0 indicates an asset of average risk. A beta coefficient greater than 1.0 indicates above average risk asset whose return tends to be more risky than the market. Assets with beta coefficients less than 1.0 are of below average risk i.e. less riskier than the market portfolio.

89

The 1st, 2nd, 3rd and 4th schemes are having high beta values so they face a high rate risk factor. And the 5th and 6th schemes are having very low rate of beta values and they are less risk proportionate comparing to the high and medium range of beta values. Remaining 7 th, 8th, 9th and 10th schemes are obtaining the medium range of beta values Alpha: It shows what the return of the fund would be when the market return is zero. Based on this we can determine which fund is giving good returns because the fund that has high alpha value gives good returns and vice-versa. The reliance growth has the high rate of alpha value comparing to the rest of the schemes so they have good returns. Then the SBI C contra, DSPL, ICICI Prudential, ING Vysya, HDFC and FT India are at the medium range of alpha values. UTI and SBI Magnum are the lowest alpha values so they gain less returns compare to the other schemes. Sharpe Ratio: It rewards schemes risk adjusted return per unit of total risk. Schemes that have high Sharpe ratio gives more risk adjusted returns per unit of total risk as compared to the schemes that have low ratio values. This ratio also rewards variability. The greater the diversification, the higher is the Sharpe ratio therefore equity diversified schemes have highest Sharpe ratios.

The FT India is having the highest Sharpe values and the variability is also very high compare to the other schemes so the face of high risk rate of returns. Then the reliance vision, ICICI Prudential, SBI Contra, ING Vysya and HDFC are having the medium range of Sharpe values. Then the reliance growths are at the less Sharpe values then remaining schemes are having the negative values. Treynor Ratio: This ratio rewards volatility because it shows risk adjusted returns per unit of market risk for that particular scheme. When the markets are more volatile, schemes with high Treynor ratio are highly affected and vice versa. A scheme with high Treynor ratio such as Equity 90

scheme will enjoy a premium when the markets are bullish and will be affected negatively when the markets are bearish. On the other hand,

scheme with low Treynor ratio such as Debt Fund will not be affected greatly, irrespective of the bullish or bearish run in the markets. Reliance growth, DSPL, ICICI Prudential, ING Vysya, are obtaining the high treynor values so they face high risky. The 7th and 8th schemes are facing the Low treynor values. Rest of the 2 schemes is having the negative values. Life Cycle stage guide to financial planning It is well known that the age of the investor is an important determinant of financial goals. Therefore financial planners have segmented investors according to certain stage in their life cycle based on this the table below shows the strategy for allocating the total fund of the client into Equity, Long and Short Term Debt and Money Market schemes Stages of lifecycle Recommende d Model Portfolio Young Unmarried 50% Aggressive Equity Fund 25% High Yield Bond Fund 25% Money Market Fund Immediate and short term Limited due to higher spending. Financial needs Ability to invest Choice of investmen t products Liquid plans and short term investments . Some exposure to equity and pension Young Married with 10% Money Market Fund 30% Aggressive Medium to long term needs 91 Limited. Financial planning products Medium to long- term investments

children

Equity Fund 25% High Yield Bond Fund 35% Govt. Bond Fund

Childrens education and consumer finance housing

needs are highest as this stage is ideal for disciplining spending and saving regularly Higher saving ratios recommende d. Requirement for intermittent cash flows higher

. Ability to take risks. Fixed income, insurance and equity products. Medium term investments with high liquidity needs. Portfolio of products including equity, debt and pension plans.

Married with Older Children

30% Short Term Debt Fund 35% Long Term Debt Fund 25% Moderately Aggressive Equity Fund 10% in Emerging Equity Fund

Medium term needs for Childrens education and marriage. Need for pension, insurance and medical cover higher.

Retired

35% Debt Fund 25% Moderately Aggressive Equity Fund 40% Money Market Fund

Monthly Income, Liquidity and Capital Preservation needs.

Limited ability that too only the amount received at the time of retirement

Highly Secure and Liquid with a capability of monthly income

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CHAPTER-IV

FINDING SUGGESTIONS & CONCLUSSION

Findings: 93

A mutual fund is an ideal investment option to solve this dilemma. A mutual fund is a pooled investment where like-minded investors come together and invest with a common objective. Thus the funds are pooled from the various investors who are geographically spread. These funds are collected and managed by professionals. Information of the markets is a key factor, which is not widely available to the common man at the precise moment. The professionals solve this problem. Based on the investment objective, the funds collected are invested in various marketable securities, in order to have a diversified portfolio and minimize the risk. To do a Comparative study on Mutual Funds so as to assist the organization in its vision to give a personalized advice regarding the appropriate Mutual Fund scheme to its clients based on their risk profile and expected returns determined through the administration and analysis of the returns, on the basis of an understanding of the structure and regulatory norms of the mutual fund industry and the classification of funds along with a risk-return analysis of the various schemes using alpha, beta, Sharpe and treynor ratios. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc. A mutual fund is the answer to all these situations. So, based on the objective, the study has covered two aspects of the business these are: Categorization of the various mutual fund schemes into three riskreturn categories on the basis of risk and returns associated with them Risk profiling of the clients so as to categorize them into high, moderate and low risk taking category Thus, in this scenario, we will help them in selecting the appropriate Mutual Fund Schemes so as to minimize their risk and maximize returns as per their individual needs.

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Risk Assessment: Financial advisers, mutual funds and brokerage firms have adopted risk questionnaires to help investors determine whether they are conservative, moderate or aggressive. Typically, such risk questionnaires have 7 to 10 questions to gauge a persons tendency to make risky or conservative choices in certain hypothetical situations. While these risk questionnaires are not precise, they are helpful in getting a rough idea of an investors risk tolerance. A specimen risk tolerance questionnaire is given

Suggestions 95

Key Imperatives Upon Which Sharekhan Limited Should Concentrate There needs to be an organized shift to the non-metro market where the real retail savings are. A proper database of the existing and prospective clients should be made using own resources like Relationship Managers, Sub Brokers and Existing clients application form or by taking help from the AMCs regarding prospective clients. Proper market segmentation should be done so as to target an appropriate segment for a particular product. Relationship Managers (RM) should concentrate more on motivating and updating sub brokers regularly on new products of the company. Sub brokers should be properly trained on products of the company and required selling and marketing skills. The distribution mechanism, which is polarized today, has to grow deeply i.e. more number of small sub brokers should be there. The high distribution cost need to be pegged at reasonable levels. There has to be more transparency regarding the rules and regulations. Move people to long-term investments.

Future Perspective The mutual fund industry must innovate and embrace technology Product Hedge Funds Pension Funds Derivatives Linked Products Venture Funds Service Sector Funds Bundled Products

Services 96

Smart triggers based on value and time of investments. Online payment systems with efficient and effective us of ATMs.

Distribution Technology channels like ATMs, kiosks etc Supermarkets Multilevel Marketing Customer Relationship management service models

Conclusion: 97

From the analysis of mutual fund schemes of Sharekhan ltd; various types of 10 schemes were analyzed by this the level of risk bearing is more. To minimize this risk bearing the company adopted Sharpe and Treynors ratios. From this the client can invest in the better schemes which are performing well and with-out risk bearing And to analyze and see the performance of the fund schemes we did the calculation of Alpha from the absolute returns of 36 months of 10 schemes, only some of the schemes had performed well which were out of the risk. Finally the investment relates to risk and uncertainty everywhere but analyzing the part of the investment with the present economic conditions and situations the investor must analyze and invest in the schemes according to the present economic crisis.

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Books:

99

Author Sharpe William F,Alexander Gordon J.

Book

Publishers

Investments

5ed. Prentice Hall(1994)

Prasanna Investment Chandra analysis portfolio management Fischer J. Donald Security Analysis Management Investment Raman V N S. Principles Techniques & Oscar Publications (2004) 6th Sub ed. Prentice Hall and Tata Mc Hill

E., Jordan Ronald &

Portfolio (1995)

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Periodicals: Quarterly Fact Sheets of the Mutual Funds, 28th February 2006 to 28th February 2007. Internet Sites: http://www.amfiindia.com/navhistoryreport.asp For Mutual Funds Historical NAVs http://www.mutualfundsindia.com/icon.asp?next_url=nav_hist.asp For Mutual Funds Historical NAVs http://www.investopedia.com/categories/mutualfunds.asp Understanding Terms related to Mutual Funds For

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