MUTUAL FUND

3.1 RESEARCH METHODOLOGY

One of the most important use of research methodology is that it helps in identifying the
problem, collecting and analyzing the required information and providing an alternative solution
to the problem. It also helps in collecting the vital information that is required by the top
management to assist them for the better decision making both day to day decisions and critical
ones.
The process used to collect information and data for the purpose of making business decisions.
The methodology may include publication research, interviews, surveys and other research
techniques, and could include both present and historical information.

3.2 STATEMENT OF THE PROBLEM

Mutual funds are the avenues for common investors to reap the benefit of share market
performance. Investing directly by an investors are fraught with highest level of risk &
uncertainty. Retail investors do not actively participate in share market. Therefore there is a
necessity to create awareness of the utility of investing in mutual funds schemes to enjoy a
return.
The present study aims to answer a few questions in this respect. What is the performance of
mutual funds in context to their risk and return incurred during the study period? Whether the
mutual funds have outperformed to the market or not. What is the position of the mutual fund
performance among the different schemes? Which type of mutual funds are performing well and
which are below the expectation level? What are the basic motives for investing in mutual fund
in India? What is the impact of regulatory norms on the mutual funds’ performance? These are
some questions which the present study attempts to answer.

3.3 TITLE OF THE STUDY

Title of the study is Performa evaluation of Mutual fund with self to ICICI Prudential

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3.4 NEED FOR THE STUDY

Mutual Fund is one of the most preferred investment alternatives for the small investors as it
offers an opportunity to invest in a diversified and professionally managed portfolio at a
relatively low cost. Over the past decade, mutual funds have increasingly become the investor’s
vehicle of choice for long-term investing. In recent times, the emerging trend in the mutual fund
industry is the aggressive expansion of the foreign owned mutual fund companies and the decline
of the companies floated by nationalized banks and small private sector players. Growth and
developments of various mutual funds products in the Indian capital market has proved to be one
of the most catalytic instruments in generating 51 momentous investment growth in the capital
market. In this context, close monitoring and evaluation of mutual funds has become essential.
Therefore the main purpose of doing this project was to know about mutual fund and its
functioning. This helps to know in details about mutual fund industry right from its inception
stage, growth and future prospects. It also helps in understanding different schemes of mutual
funds. Because my study depends upon prominent funds in India and their schemes like equity,
income, balance as well as the returns associated with those schemes. The project study was
done to ascertain the asset allocation, entry load, exit load, associated with the mutual funds.
Ultimately this would help in understanding the benefits of mutual funds to investors.

3.5 OBJECTIVES OF THE STUDY

The present study is concerned with the following objectives:
1. To identify systematic risk
2. To identify return variance
3. To know about the selection parameters for mutual fund
4. To evaluate the overall performance of mutual funds
5. To give an idea of the types of schemes available

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3.6 SCOPE OF THE STUDY

The scope of the study is reasonably broader and includes attribute evaluation by considering all
the attributes like, Objective of fund, portfolio composition, Total risk, Total Return, Fund
inception, Funds past performance, Fund manager experience, Fund size, Funds managed by
fund manager, Expense ratio, Diversification, Liquidity, stability for fund and income, Fund
manager style and their level. The scope of the study is confined to mutual fund industry in India
with reference to major mutual fund companies in India.

3.7 LIMITATIONS

 Lack of information sources for the analysis part.

 Time, cost and location factors become major difficulties in completion of research.
 The data provided by the prospects may not be 100% correct as they too have their
limitations.
 Lack of accessibility to mutual fund companies to collect primary data.
 Lack of accessibility to primary data.

3.8 RESEARCH DESIGN

The present research is an attempt to study comparative performance of mutual funds in general
in India. The study focus on mutual fund schemes of Indian companies comprising Equity, Debt
and Hybrid Schemes. The totals of 20 Indian mutual fund companies are selected for the study.
The Asset management companies selected for the study are Birla Sun Life, Franklin Templeton,
HDFC, ICICI Prudential, IDFC, L&T, Reliance, SBI, UTI mutual fund and some 11 more
companies.
This report is based on secondary data, however primary data collection is given more
importance since it is overheating factor in attitude studies which here I was not able to collect it.
The methodology adopted in this study is explained below:

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A. Literature Survey: I have used newspapers, magazines related to business &finance & apart
from websites.

B. Type of research: The research is quantitative & descriptive in nature. Quantitative research
is one that talks about the quantity of the subject to be researched and Descriptive research is one
that describes things as exists in present.

C. Data collection Design:

Sources of data: There are two sources for collecting the data which in this report I have
collected the data from secondary sources which is secondary data only.
Secondary sources: The sources of secondary data are government publications, magazines,
journals, Survey reports and reference books etc. Major source of secondary data being SEBI
Web site.

3.9 FINANCIAL AND STATISTICAL TOOLS FOR MEASUREMENT

In this research I have used the following techniques to study the performance of Mutual
Funds which are as under:

AVERAGE
Average means numbers or names, arrays or references that contained numbers. Other words
average means number representations of numbers.

STANDARD DEVIATION
Standard deviation is a measure of total risk, defined as the sum of systematic and non-
systematic risk. One may define it as the dispersion of outcomes around the mean, which is the
average return for a sample of data. Accordingly, it is a measure of central tendency. The greater
an investment's standard deviation, the greater is its risk.
Standard deviation provides investors with a mathematical basis for their investment decisions.
Standard deviation is a measure of variability or diversity that shows how much variation there is
from the mean. The standard deviation of a data set is the square root of its variance.

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∑N ̅ )2
i=1(xi − x
S=√
N
Where, Xi = each value of dataset, x̄ (= the arithmetic mean of the data (This symbol will be
indicated as the mean), N = the total number of data points.

BETA
A relative measure of the sensitivity return on security is to change in the broad market index
return. Beta measure the systematic risk, it shows how prices of securities respond to the market
forces. Beta is calculated by relating the return on a security with return for the market. Market
will have 1.0, if the beta is greater than 1 than the stock is said to be very riskier than market risk,
beta less than 1 than the stock is said to be not that much riskier as compare to the market risk.
Beta involved market risk, and market risk involved political
risk, inflation risk, and interest rate risk.

cov(r,km )
Beta = 2
[(stddev(km ))]

Where,
r = return on the fund examining,
Km= return on the index choosing as a proxy for the stock market

SHARPE– RATIO
A Sharpe ratio indicates the risk premium of portfolio relative to the total amount of risk in the
portfolio. Sharpe ratio summarizes. The risk and return of a portfolio in a single measure that
categories the performance of funds on the risk adjusted basis. The larger the Sharpe ratio, the
portfolio is over performing the market and vice – versa.
(Ri −Rf )
Sharp Ratio = Si

Where, Si is standard deviation of the fund Ri is return on investment; Rf is risk free rate of
interest.

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NAV
NAV means the market value of the assets minus the liabilities on the day of valuation. In the
other words, it is the amount which the shareholder will collectively get if the fund is dissolved
Assets + Accrued Income – Liabilities – Accrued Liabilities
or liquidated. NAV = Number of Share or Units Outstanding

3.10 TOOLS OF ANALYSIS

Sharpe’s Performance
Sharpe’s performance index gives a single value to be used for the performance ranking of
various funds or portfolios. Sharpe Index measures the risk premium of the portfolio relative to
the total amount of the risk in the portfolio. This risk premium is the Different between the
portfolio’s average rate of return and the risk less rate of return. The standard deviation indicates
portfolio the risk. The index assigns the highest values to assets that have best risk adjusted
average rate of return.

St = Rp – Rf / 6p
Sharpe’s index = portfolio average return – risk free rate of return / S.D. Of the portfolio return.

JENSON MEASURE
The absolute risk adjusted return measure was developed by Michael Jensen and commonly
Known as Jensen’s measure. It is mentioned as a measure of absolute performance because a
Definite standard is set and against that the performance is measured. The standard is based
On the manager’s predictive ability successful prediction of security price would enable the
Manager’s to earn higher returns than the ordinary investor expects to earn in a given level of
risk.
Jenson’s Measure = Portfolio Average Return –[Risk Free Rate of Return +
Beta oF Fund(Benchmark return − Risk free return)]

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TRAINOR’S PERFORMANCE INDEX

The Trey nor index, an investor should know the concept of characteristic line. The relationship
between a given market return and the fund’s return is given by the characteristic line.
The fund’s performance is measured in relation to the market performance. The ideal fund’s
return rises at a faster rate than the general market performance when the market is moving
upwards and it’s rate of return declines slowly than the market return, in the decline. The ideal
fund may place its fund in the treasury bills or short sell the stock during the decline and earn
positive return.
Rp = a + B (Rm – Rf)
Rp = Average return of portfolio
Rf = Risk less rate of return
a = The intercept
B = A measure of systematic risk
Rm = Average market return
Mutual funds Returns: Returns are calculated through the following formula:

(𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐍𝐀𝐕−𝐏𝐫𝐞𝐯𝐢𝐨𝐮𝐬 𝐍𝐀𝐕)

Mutual funds Returns = × 100
𝐏𝐫𝐞𝐯𝐢𝐨𝐮𝐬 𝐍𝐀𝐕

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3.11 LITERATURE REVIEW.

Soumya Guha Deb, Ashok Banerjee and B.B. Chakrabarti (2009) studied “Return Based
Style Analysis (RBSA) to evaluate equity mutual funds in India” using quadratic optimization of
an asset class factor model proposed by William Sharpe and analysis of the relative performance
of the funds with respect to their style benchmarks. The study found that the mutual funds
generated positive monthly returns on the average, during the study period of January 2000
through June 2005. The ELSS funds lagged the Growth funds or all funds taken together, with
respect to returns generated. The mean returns of the growth funds or all funds were not only
positive but also significant. The ELSS funds also demonstrated marginally higher volatility
(standard deviation) than the Growth funds.

Three parametric models random walk, moving average, exponentially weighted moving average
and one non parametric model were employed to predict the VaR of a sample of equity MFs in
India in a rolling basis and actual changes in NAV registered by the funds were compared with
the estimated VaR post facto. The results indicated presence of considerable downside risk for an
investor in equity MFs for the study period under consideration. The study also tested the
robustness of the models using two popular back testing approaches. The statistical tests of the
models based on the framework indicated that random walk model & moving average model
suffered from a down ward bias and err by underestimating the VaR frequently. The EWMA and
historical simulation methods are relatively free from that bias but they show a few instances of
providing too conservation estimates of VaR. The researchers have put forward on case for
adapting VaR based risk management systems for investment industry as a whole in India.
Soumya Guha Deb, Ashok Banerjee and B.B. Chakrabarti (2009) studied “Return Based
Style Analysis (RBSA) to evaluate equity mutual funds in India” using quadratic optimization of
an asset class factor model proposed by William Sharpe and analysis of the relative performance
of the funds with respect to their style benchmarks. The study found that the mutual funds
generated positive monthly returns on the average, during the study period of January 2000
through June 2005. The ELSS funds lagged the Growth funds or all funds taken together, with
respect to returns generated. The mean returns of the growth funds or all funds were not only
positive but also significant. The ELSS funds also demonstrated marginally higher volatility
(standard deviation) than the Growth funds.

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Dr. Susheel Kumar Mehta (2010) in the article named “SBI vs. UTI – a comparison of
performance of mutual funds schemes”. has taken 10 UTI and 10 SBI mutual funds and analyzed
their performance. The study concluded that preference of UTI & SBI mutual funds has been
better in 2007 – 08. When compared to 2006-07 SBI performance was & good in 45 both the
years. No consistency for both the companies’ mutual funds in terms of returns. Consistency is
observed for risk. UTI money market mutual funds dividend & SBI magnum income plus fund-
saving plan growth are found to be least risky among selected schemes of UTI & SBI. UTI were
more defensive than SBI schemes. SBI magnum comma fund – dividend had been the most
aggressive scheme & UTI money market mutual funds daily dividend has been the most
differential scheme. Aggressiveness was the right strategy. SBI’s magnum comma fund dividend
has preference very well during both the years. During 2006-07 all the selected schemes gave
dismal performance which gave same preference. As of market based on risk adjusted measures
of Sharpe, Treynor & Jensen. During 2007-08 only one of the selected UTI schemes master
value fund growth option performed better followed by MEF – G. & MBF – G performed better
than market. Whereas SBI – MCF dividend follow by MEF – G & MBF-G – performed better
than Market. As superior stock selection is concerned none of the portfolio Manager selected
UTI & SBI showed skills during 2006-07. It was only 2007-08 managers of SBI MCF – D-
eructed some superior stock selection skills.

Sanjay Kumar Mishra and Manoj Kumar (2011) “How mutual fund investors objective and
subjective knowledge impacts their information search and processing behavior” in the article
attempted to prove how Contrary to the popular belief that objective knowledge (OK) (that is,
what is actually stored in the memory) and subjective knowledge (SK) (that is, what individuals
perceive they know) differently impact information search and information-processing behavior,
with an empirical study conducted on 268 mutual funds (MF). Investors suggest no significant
difference in the impact of OK and SK on the width and depth of information search and
information processing. The study suggested that OK and SK significantly positively impact the
width and depth of information search and information-processing behaviour, however, no
significant difference exists in the way they impact. The possible explanation put forward is that
even though MF investors may suffer from self-deception (that is, pseudo expertise) and report

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high knowledge (that is, high SK), the impact of SK on actual investment behavior is not
significantly different from that of OK.

Deepak Agrawal (2011) in the study “Measuring Performance of Indian Mutual Funds” touched
the development of Indian capital market and deregulations of the economy in 1992. Since the
development of the Indian Capital Market and deregulations of the economy in 1992 there have
been structural changes in both primary and secondary markets. Mutual funds are key
contributors to the globalization of financial markets and one of the main sources of capital flows
to emerging economies. Despite their importance in emerging markets, little is known about their
investment allocation and strategies. This article provided an overview of mutual fund activity in
emerging markets. It described about their size and asset allocation. The paper is a process to
analyze the Indian Mutual Fund Industry pricing mechanism with empirical studies on its
valuation. The data is also analyzed at both the fund-manager and fund-investor levels. The study
revealed that the performance is affected by the saving and investment 50 habits of the people
and the second side the confidence and loyalty of the fund Manager and rewards affects the
performance of the MF industry in India.

Zhi Da, Pengjie Gao, and Ravi Jagannathan (2011) in the article “Impatient Trading,
Liquidity Provision, and Stock Selection by Mutual Funds” showed that a mutual fund's stock
selection skill can be decomposed into additional components that include liquidity-absorbing
impatient trading and liquidity provision. The study proved that past performance predicts future
performance better among funds trading in stocks affected more by information events Past
winners earn a risk-adjusted after-fee excess return of 35 basis points per month in the future.
Most of that superior performance comes from impatient trading. The paper also states that
impatient trading is more important for growth-oriented funds, and liquidity provision is more
important for younger income funds.

Ajay Khorana, Henri Servaes, and Peter Tufano (2012) studied the mutual fund industry in
56 countries and examined where this financial innovation has flourished. The fund industry is
larger in countries with stronger rules, laws, and regulations and specifically where mutual fund
investors' rights are better protected. The industry is also larger in countries with wealthier and
more educated populations, where the industry is older, trading costs are lower and in which

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defined contribution pension plans are more prevalent. The industry is smaller in countries where
barriers to entry are higher. These results indicate that laws and regulations, supply-side and
demand-side factors simultaneously affect the size of the fund industry.

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3.12 CHAPTER SCHEME

Chapter –1: Introduction To Mutual Fund

This chapter includes the Introduction to Mutual Fund, Meaning, Definition, Characteristics,
Advantages, Disadvantages and Porter’s Five Force (Porter’s Model) To Mutual Fund.

Chapter –2: Mutual Fund Industry In India

This chapter includes Introduction To Mutual Fund In India, Brief History Of Mutual Fund In
India, Association Of Mutual Funds In India, Structure Of Mutual Funds In India, Types Of
Mutual Funds Schemes In India, Selection Parameters For Mutual Fund, Risk Factors Of Mutual
Funds, Growth Of Mutual Funds In India, Mutual Fund Companies In India, And SWOT
Analysis.
Chapter –3: Research Methodology
This chapter includes, Statement Of The Problem, Title of the Study, Need For The Study, Scope
Pf The Study, Limitations, Research Design, Financial And Statistical Tools For Measurement,
Tools Of Analysis, And Literature Review

Chapter –4: Analysis and interpretation

This chapter includes Analysis and interpretation based on the standard deviation of the fund,
Analysis according to average fund return and average market return
Analysis according to beta

Analysis according to Sharpe– ratio

Analysis according to Jensen (alpha)

Analysis according to Treynor ratio

Chapter –5: Finding

This chapter includes Findings Suggestion CONCLUSION bibliography

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