CONTENTS PAGE NO
' Part A: About the Industry
' Part B: About the Subject
2 LITERATURE REVIEW
3 RESEARCH DESIGN
' Statement of the Problem
' Objective of the Study
' Sample design
' Need for study
' Scope of study
' Research design
' Operational definition of the concepts
' Tools and techniques for data collection
' Limitations of the Study
Overview of Chapter scheme
4 DATA ANALD DATA ANALYSIS AND INTERPRETATION
5 SUMMARY OF FINDINGS, CONCLUSIONS, SUGGESTIONS AND RECOMMENDATIONS
ABOUT THE INDUSTRY
Indian capital market is one of the oldest and largest capital markets of the world. It history can be traced back to 19th century. The first instance of organized trading corporate securities in India is related to the trading in securities of East India Company. The concept of limited liability introduced with enactment of companies act, 1850 helped in commencing an era of joint-stock companies, which in turn paved the way for the development of capital market. In due course, broker used to assemble at some common places to conduct trade. By 1874, Dalal Street in Mumbai became a prominent place of meeting of the broker. Bombay Stock Exchange (BSE) the first organized stock exchange in the country was started functioning in 1875. However, it was in 1887 the BSE formally established as a society named Native Share and Stock Brokers Association.
The effects of industrial revolution began to be felt in India by the dawn of 20th century. This period was also marked by the Swadeshi Movement which created much industrial enthusiasm in the country. During the period of first and Second World War, industrial sector as well as capital market exhibited much dynamism. After independence the Indian government gave priority to the infrastructure development, considering the urgency of proceeding with large scale industrial development. Accordingly many financial institutions like IFC, ICICI, LIC, UTI, and IDBI were established to accelerate the pace of industrialization in India. The promulgation of the companies' act, 1956 based on recommendations of the company Law committee was another important event. The passing of FERA 1973 limited the share holding of foreign firms to 40%, if they were recognized to be as Indian company. For diluting their share holding, many MNC's offered shares to the public at attractive rates. Encouraged by good response to these issues, much domestic company also came out with public issues. Individual investors were enthusiastic to invest in the capital market as the found equity investment to be hedge against inflation and source of higher earning compared to other investments.
CAPITAL MARKET OPERATIONS
It consist manly of primary market operation and secondary market operations. Primary market or new issue market deals with the issue of new securities to investors on facilitates the corporate sectors in raising funds. The primary market is made up of two components: where the firms go public for the first time through initial public offering and where the firms which are already traded raise additional capital through seasoned equity offerings.
In the Secondary market the securities which are floated and subscribed in the primary market are traded. The primary function of stock exchange or secondary market is to provide liquidity of capital and continuous market for outstanding securities. The stock exchange brings about a correct evaluation of securities and set prices of securities close to their investment worth.
OVERVIEW OF INDIAN STOCK MARKET
The only stock exchanges operating in the 19th century were those of Mumbai set up in 1875 and Ahmadabad set up in 1894. These were organized as voluntary non-profit making associations of brokers to regulate and protect their interest. Before the control on securities trading became a central subject under the Constitution in 1950, it was a state subject and the Bombay Security Contracts (Control) Act of 1925 used to regulate trading in securities. Under this act, the Bombay Stock Exchange was recognized in 1927 and Ahmadabad in 1937. During the war boom, a number of stock exchanges were organized even in Mumbai, Ahmadabad and other centers, but they were not recognized. Soon after it became a central subject. Central legislation was proposed and a committee headed by A.D. Gorwala went into the Bill for securities regulation. On the basis of the committee's recommendations and public discussion, the Securities Contracts (Regulation) Act SC(R) Act became law in 1956.
'Stock Exchange means any body or individuals whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling, or dealing in securities'. It is an association of member brokers for the purpose of self ' regulation and protecting the interests of its members. It can operate only if it is recognized by the government under the Securities Contracts (Regulation) Act, 1956. The recognition is granted under section 3 of the act by the central government, ministry of finance.
Present recognized stock exchanges
At present, there are 21 stock exchanges recognized under the securities contracts (regulation) Act, 1956. They are located at Bombay, Calcutta, Madras, Delhi, Ahmedabad, Hyderabad, Indore, Bhuwandeshwar, Mangalore, Patna, Bangalore, Rajkot, Guwahati, Jaipur, Kanpur, Ludhiana, Baroda, Cochin and Pune. The recently recognized stock exchanges are at Coimbatore and Meerut. Visakhanatnam stock exchange was recognized in 1996 for electronic trading. A stock exchange has also been sought for this body as the jurisdiction of the Securities Contracts (Regulation) Act, 1956 has not so far been extended to the areas covered by the state. A decade ago, there were hardly 8 stock exchanges in the country. There is no trading, how ever, in Meerut and Vishakhapatnam stock exchanges.
The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Ltd (NSE) are the two primary exchanges in India. In addition, there are 22 Regional Stock Exchanges in India. However, the BSE and NSE have established themselves as the two leading exchanges and account for about 80% of the equity volume traded in India.
The NSE and BSE are equal in size in terms of daily traded volume. The average daily turnover at the exchanges has increased from 851 crore in 1997-98 to 1,284 crore in 1998-99 and further to Rs 2,273 crore in 1999-2000 (April 'August 1999).
NSE has around 1500 shares listed with a total market capitalization of around 9,21,500 crores.The BSE has over 6000 stocks listed and has a market capitalization of around 9,68,000 cores.
The primary index of BSE is BSE Sensex comprising 30 stocks. NSE has the S&P NSE 50 Index (NIFTY) which consists of fifty stocks. The BSE Sensex is the older and more widely followed index. Both the exchanges have switched over from the open outcry trading system to a fully automated computerized mode of trading known as (BSE Online Trading) BOLT and (National Exchange Automated Trading) NEAT system. It facilitates more efficient processing, automatic order matching, faster execution of trades and transparency.
The key regulator governing stock exchanges, brokers, depositories, depository participants, mutual funds, FII and other participants in Indian secondary and primary market is the Securities & Exchange Board of India (SEBI) Ltd.
ABOUT THE SUBJECT
HISTORY OF THE MUTAL FUND
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
Definition of Mutual Fund-
The SEBI (MF) Regulations, 1993 defines mutual fund as 'A fund established in the form of a trust by a sponsor to raise monies by the trustees through the sale of units to the public under one or more schemes for investing in securities in accordance with these regulations.'
Mutual Fund Industry-
Mutual fund industry in India began with setting up of Unit Trust of India (UTI) in 1964 by the government of India. During last 39 years UTI has grown to be a dominant player in the industry. The UTI is governed by a special legislation, the Unit Trust of India Act 1963. In 1987 public sector banks and insurance companies were permitted to set up mutual funds and accordingly in 1987 six public sectors banks have set up mutual funds. Also the two insurance companies LIC and GIC established the mutual funds.
Securities Exchange Board of India (SEBI) formulated the mutual fund regulation in 1993, which for the first time established a comprehensive regulatory framework for
the mutual fund industry. Since then several mutual funds have been set up the private and joint sectors.
History of Mutual Fund-
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank. The history of mutual funds in India can be broadly divided into four distinct phases.
First Phase ' 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management.
Second Phase ' 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by 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.
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 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.
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 corers as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund 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 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.
Concept of Mutual Fund-
Steps of concepts of Mutual Fund-
1. Many investors with the common objective pool their money in Mutual Fund.
2. Investors on a proportionate basis, get mutual fund units for the sum contributed to the pool.
3. The money collected by the investors is invested into the shares, debentures and other securities by the Fund Manager.
4. The Fund manager realizes gains or losses, and collects dividends or interest Income.
5. Any capital gains or losses from such investment are passed on to the
6. Investors in proportion of the number of units held by them.
Any change in the value of the investments made into capital market instruments (such as shares, debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme is calculated by dividing the market value of scheme's assets by the total number of units issued to the investors.
Working of Mutual Fund
To protect the interest of the investors, SEBI formulates policies and regulates the mutual funds. It notified regulations in 1993 (fully revised in 1996) and issues guidelines from time to time. MF either promoted by public or by private sector entities including one
promoted by foreign entities is governed by these Regulations.
SEBI approved Asset Management Company (AMC) manages the funds by making investments in various types of securities. Custodian, registered with SEBI, holds the
securities of various schemes of the fund in its custody.
According to SEBI Regulations, two thirds of the directors of Trustee Company or board of trustees must be independent.
The Association of Mutual Funds in India (AMFI) reassures the investors in units of mutual funds that the mutual funds function within the strict regulatory framework. Its
objective is to increase public awareness of the mutual fund industry.
AMFI also is engaged in upgrading professional standards and in promoting best industry practices in diverse areas such as valuation, disclosure, transparency etc.
Organization of a Mutual fund There are many entities involved and the diagram below illustrates the organizational set up of a mutual fund:
Types of Mutual Fund schemes-
A. Schemes according to Maturity Period:
A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.
1. Open-ended Fund/ Scheme
An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.
2. Close-ended Fund/ Scheme
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual funds NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.
B. Schemes according to Investment Objective:
A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows.
1 Equity Funds-
Equity funds are considered to be the more risky funds as compared to other fund types, but they also provide higher returns than other funds. It is advisable that an investor looking to invest in an equity fund should invest for long term i.e. for 3 years or more. There are different types of equity funds each falling into different risk bracket. In the order of decreasing risk level, there are following types of equity funds:
' Growth Funds - Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years) but they are different from Aggressive Growth Funds in the sense that they invest in companies that are expected to outperform the market in the future. Without entirely adopting speculative strategies, Growth Funds invest in those companies that are expected to post above average earnings in the future.
' Sector Funds: Equity funds that invest in a particular sector/industry of the market are known as Sector Funds. The exposure of these funds is limited to a particular sector (say Information Technology, Auto, Banking, Pharmaceuticals or Fast Moving Consumer Goods) which is why they are more risky than equity funds that invest in multiple sectors.
' Mid-Cap or Small-Cap Funds: Funds that invest in companies having lower market capitalization than large capitalization companies are called Mid-Cap or Small-Cap Funds. Market capitalization of Mid-Cap companies is less than that of big, blue chip companies (less than Rs. 2500 crores but more than Rs. 500 crores) and Small-Cap companies have market capitalization of less than Rs. 500 crores. Market Capitalization of a company can be calculated by multiplying the market price of the company's share by the total number of its outstanding shares in the market. The shares of Mid-Cap or Small-Cap Companies are not as liquid as of Large-Cap Companies which gives rise to volatility in share prices of these companies and consequently, investment gets risky.
' Equity Linked Saving Scheme- These funds are well diversified and reduce sector-specific or company-specific risk. However, like all other funds diversified equity funds too are exposed to equity market risk. One prominent type of diversified equity fund in India is Equity Linked Savings Schemes (ELSS). As per the mandate, a minimum of 90% of investments by ELSS should be in equities at all times. ELSS investors are eligible to claim deduction from taxable income (up to Rs 1 lakh) at the time of filing the income tax return. ELSS usually has a lock-in period and in case of any redemption by the investor before the expiry of the lock-in period makes him liable to pay income tax on such income(s) for which he may have received any tax exemption(s) in the past.
' Dividend Yield Funds -The objective of Equity Income or Dividend Yield Equity Funds is to generate high recurring income and steady capital appreciation for investors by investing in those companies, which issue high dividends. Equity Income or Dividend Yield Equity Funds are generally exposed to the lowest risk level as compared to other equity funds.
' Gold Fund- The objective of this fund is accumulating the money at the gold rate according to the units held by the investors. This is one of the new fund introduced. Here all the investors will invest for the pool account of mutual fund and that amount is invested in the gold. And according to the fluctuation of the rates of gold in the market, fund manager invest when rates are in good rates like this profit earned from this gold fund is distributed according to the units held by the investors
2. Debt funds-
Funds that invest in medium to long-term debt instruments issued by private companies, banks, financial institutions, governments and other entities belonging to various sectors (like infrastructure companies etc.) are known as Debt / Income Funds.
Debt funds are low risk profile funds that seek to generate fixed current income (and not capital appreciation) to investors. In order to ensure regular income to investors, debt (or income) funds distribute large fraction of their surplus to investors. Although debt securities are generally less risky than equities, they are subject to credit risk (risk of default) by the issuer at the time of interest or principal payment. To minimize the risk of default, debt funds usually invest in securities from issuers who are rated by credit rating agencies and are considered to be of "Investment Grade". Debt funds that target high returns are more risky. Based on different investment objectives, there can be following types of debt funds:
' Diversified Debt Funds - Debt funds that invest in all securities issued by entities belonging to all sectors of the market are known as diversified debt funds. The best feature of diversified debt funds is that investments are properly diversified into all sectors which results in risk reduction. Any loss incurred, on account of default by a debt issuer, is shared by all investors which further reduces risk for an individual investor.
' High Yield Debt funds - As we now understand that risk of default is present in all debt funds, and therefore, debt funds generally try to minimize the risk of default by investing in securities issued by only those borrowers who are considered to be of "investment grade". But, High Yield Debt Funds adopt a different strategy and prefer securities issued by those issuers who are considered to be of "below investment grade". The motive behind adopting this sort of risky strategy is to earn higher interest returns from these issuers. These funds are more volatile and bear higher default risk, although they may earn at times higher returns for investors.
' Assured Return Funds - Although it is not necessary that a fund will meet its objectives or provide assured returns to investors, but there can be funds that come with a lock-in period and offer assurance of annual returns to investors during the lock-in period. Any shortfall in returns is suffered by the sponsors or the Asset Management Companies (AMCs). These funds are generally debt funds and provide investors with a low-risk investment opportunity.
' To safeguard the interests of investors, SEBI permits only those funds to offer assured return schemes whose sponsors have adequate net-worth to guarantee returns in the future. In the past, UTI had offered assured return schemes (i.e. Monthly Income Plans of UTI) that assured
' specified returns to investors in the future. UTI was not able to fulfill its promises and faced large shortfalls in returns. Eventually, government had to intervene and took over UTI's payment obligations on itself. Currently, no AMC in India offers assured return schemes to investors, though possible.
' Fixed Term Plan Series - Fixed Term Plan Series usually are closed-end schemes having short-term maturity period (of less than one year) that offer a series of plans and issue units to investors at regular intervals. Unlike closed-end funds, fixed term plans are not listed on the exchanges. Fixed term plan series usually invest in debt / income schemes and target short-term investors. The objective of fixed term plan schemes is to gratify investors by generating some expected returns in a short period.
3. Balanced Fund-
A balanced fund is one that has a portfolio comprising debt instruments, convertible securities, and Preference equity shares. Their assets are generally held in more or less equal proportions between debt/money market securities and equities. By investing in a mix of this nature, balanced funds seek to attain the objectives of income, moderate capital appreciation and preservation of capital, and are ideal for investors with a conservative and long-term orientation.
ADVANTAGES AND DISADVENTAGE OF MUTUAL FUND
ADVANTAGES OF MUTUAL FUND:
1. Portfolio Diversification: Mutual Funds invest in a well-diversified portfolio of securities which enables investor to hold a diversified investment portfolio (whether the amount of investment is big or small).
2. Professional Management: Fund manager undergoes through various research works and has better investment management skills, which ensure higher returns to the investor than what he can manage on his own.
3. Less Risk: Investors acquire a diversified portfolio of securities even with a small investment in a Mutual Fund. The risk in a diversified portfolio is lesser than investing in merely 2 or 3 securities
4. Low Transaction Costs: Due to the economies of scale (benefits of larger volumes), mutual funds pay lesser transaction costs. These benefits are passed on to the investors.
5. Flexibility: Investors also benefit from the convenience and flexibility offered by Mutual Funds. Investors can switch their holdings from a debt scheme to an equity scheme and vice-versa. Option of systematic (at regular intervals) investment and withdrawal is also offered to the investors in most open-end schemes.
6. Safety: Mutual Fund industry is part of a well-regulated investment environment where the interests of the investors are protected by the regulator. All funds are registered with SEBI and complete transparency is forced.
DISADVANTAGES OF MUTUAL FUND
1. Cost control not in the Hands of an Investor: Investor has to pay investment management fees and fund distribution costs as a percentage of the value of his investments (as long as he holds the units), irrespective of the performance of the fund.
2. No Customized Portfolios: The portfolio of securities in which a fund invests is a decision taken by the fund manager. Investors have no right to interfere in the decision making process of a fund manager, which some investors find as a constraint in achieving their financial objectives.
3. Difficulty in Selecting a Suitable Fund Scheme: Many investors find it difficult to select one option from the plethora of funds/schemes/plans available.
Mutual Fund Type Who Should Invest Objective Investment Portfolio Risk Term of investment
Growth Fund Aggressive investors High growth Equity shares High Risk 3-5 years
Sector Fund Aggressive investors High growth Equity shares Very high 1-3years
Mid-cap and Small-cap Fund Aggressive investors Long term growth Equity shares High risk 1-3 years
Equity Linked Saving Scheme Moderate and aggressive investors Long-term growth with tax saving Equity shares High 1-3years
Dividend Fund Moderate Investors Return Preference shares Low 1-3 years
Gold Fund Moderate and aggressive investors Long term growth Equity shares Low 3-5 years
Diversified debt Moderate and aggressive investors High growth Equity shares and Preference share High 1-3years
High yield debt Moderate Investors High Return Equity shares Low 1-3years
Assured return Moderate Investors Return Equity shares Low 1-3years
Fixed term plan Moderate Investors Moderate Investors Equity shares Low 3-5 years
A number of recent studies have examined the issue of performance persistence in mutual funds. Grinblatt and Titman (1992) analyze performance of 279 funds over the period of 1975 to 1984 using a benchmark technique and find evidence that performance differences between funds persists over time. Hendricks, Patel, and Zeckhauser (1993) study 165 no-load growth-oriented funds over the period 1974 to 1988 and obtain similar results. In a study of 728 mutual fund returns over the period 1976 to 1988, Goetzman and Ibbotson (1994) find that two-year performance is predictive of performance over the successive two years. Volkman and Wohar (1995) extend this analysis to examine factors that impact performance persistence. Their data consists of 322 funds over the period 1980 to 1989, and shows performance persistence is negatively related to size and negatively related to levels of management fees.
Studies of performance persistence in mutual funds are not without contrary evidence. Carhart (1997) shows that expenses and common factors in stock returns such as beta, market capitalization, one-year return momentum, and whether the portfolio is value or growth oriented "almost completely" explain short term persistence in risk-adjusted returns. He concludes that his evidence does not "support the existence of skilled or informed mutual fund portfolio managers" (Carhart, 1997, p. 57). In the Kahn and Rudd 1995 study of 300 equity funds and 195 bond funds between 1983 and 1993, only the bond funds show evidence of persistence. In an article in this issue, Detzel and Weigand (1998) use a regression residual technique to control for the effects of investment style, size and expense ratios. They find, after controlling for these variables, no evidence of performance persistence.
Two other studies have used performance ranks. Dunn and Theisen (1983) rank the annual performance of 201 institutional portfolios for the period 1973 through 1982 without controlling for fund risk. They found no evidence that funds performed within the same quartile over the ten-year period. They also found that ranks of individual managers based on 5-year compound returns revealed no consistency.
Bauman and Miller (1995) studied the persistence of pension and investment fund performance by type of investment organization and investment style. They employed a quartile ranking technique because they noted that "investors pay particular attention to consultants' and financial periodicals' investment performance rankings of mutual funds and pension funds" (Bauman & Miller, 1995, p. 79). They found that portfolios managed by investment advisors showed more consistent performance (measured by quartile rankings) over market cycles and that funds managed by banks and insurance companies showed the least consistency. They suggest that this result may be caused by a higher turnover in the decision-making structure in these less consistent funds.
NAV & it's impact on the returns:
We feel that a MF with lower NAV will give better returns. This again is due to the wrong perception about NAV. An example will make it clear that returns are independent of the NAV.
Say you have Rs 12,000 to invest. You have two options, wherein the funds are same as far as the portfolio is concerned. But say one Fund X has an NAV of Rs 12 and another Fund Y has NAV of Rs 50. You will get 1200 units of Fund X or 200 units of Fund Y. After one year, both funds would have grown equally as their portfolio is same, say by 25%. Then NAV after one year would be Rs 12.50 for Fund X and Rs 62.50 for Fund Y. The value of your investment would be 1200*12.50 = Rs 12,500 for Fund X and 200*62.5 = Rs 12,500 for Fund Y. Thus your returns would be same irrespective of the NAV.
It is quality of fund, which would make a difference to your returns. In fact for equity shares also broadly this logic would apply. An IT company share at say Rs 1200 may give a better return than say a jute company share at Rs 50, since IT sector would show a much higher growth rate than jute industry (of course Rs 1200 may 'fundamentally' be over or under priced, which will not be the case with MF NAV).
- Sanjay MataiThe author is an investment advisor and can be reached at [email protected]
Benchmarking your mutual fund:
You can't tell how well a mutual fund has performed by studying its historical returns alone. Instead, you should compare those returns with the returns-over the same period-of an appropriate benchmark, or measuring stick. You can generally find benchmark performance figures in the fund's prospectus and annual report, as well as in newspapers and financial publications. Two types of benchmarks are used to gauge fund performance: Market Index. Tracks the total returns of all the securities in the market or a segment of the market. For example, the BSE SENSEX tracks 30 stocks representing important sectors of Indian economy. Peer Group Average. Measures the average returns of a group of funds with similar investment goals and policies.
When trying to determine a measure of performance, mutual fund investors usually look around for an appropriate benchmark to get some idea about how well their funds are doing. Many investors make the mistake of comparing all of their mutual funds to the most widely known of benchmarks, the S&P 500 Index. But this comparison can be a downright mistake which can lead to inaccurate conclusions about a fund's performance. How many times have we heard the saying "compare apples to apples and not to bananas", the idea of establishing correct or rather relevant benchmarks against which you can compare your funds performance is similar.
Coming back to comparing apples with apples -Income or Debt funds normally invest in fixed-income securities like bonds and corporate debentures. These schemes have investments with a short-to-medium term period with a specific focus of preserving the capital. Equity, or Growth funds invest predominantly in stock market instruments. Balanced Funds invest partly in equity and partly in debt and normally should be looked at with a 3-5 years time horizon. Money market and liquid funds invest mainly in short-term instruments like treasury bills, government securities, certificates of deposit, commercial paper and call money and are for a much shorter duration like even 30 days.
So just looking at the diverse portfolio ratios in terms of the type of instruments you can understand how important it is to compare the returns against the right type of benchmark. Benchmarks help in measuring the performance of fund managers.
An all-equity fund should obtain returns like the overall stock market index. A 50:50 debt:equity fund should obtain returns close to those obtained by an investment of 50% in the index and 50% in fixed income. As per Sebi guidelines, for schemes in existence for more than a year, the annualized yield should be shown while for funds in existence for less than one year, such returns should not be annualized. For money market schemes and other liquid schemes of mutual funds, the performance can be shown by a simple annualisation of yields if a performance figure is available for at least 30 days. The Sebi circular also touches on the benchmarks to be used while comparing growth parameters. For instance, it has suggested that growth funds with a minimum 60 per cent of investments in equities should always be compared against BSE or NSE indices. Similarly, income funds should be benchmarked against comparable induce such as the I-Sec Bond Total Return Index.
12 Most Important Things to Read in an Offer Document:
Date of issue
First, verify that you have received an up-to-date edition of the OD. An OD must be updated at least annually.
Mutual funds differ both in the minimum initial investment required, and the minimum for subsequent investments. For example, equity funds may stipulate Rs 5000 while Institutional Premium Liquid Plans may stipulate Rs 12 crore as the minimum balance
The goal of each fund should be clearly defined ' from income, to long -term capital appreciation. The investors need to be sure the fund's objective matches their objective.
An OD will outline the general strategies the fund managers will implement. You'll learn what types of investments will be included, such as government bonds or common stock. The prospectus may also include information on minimum bond ratings and types of companies considered appropriate for a fund. Be sure to consider whether the fund offers adequate diversification.
Past Performance data
They must check that the benchmark chosen by the fund to compare its relative performance is appropriate. Sebi is doing a fine job of ensuring this as well. In addition, investors should keep in mind that many of the returns presented in historical data don't account for tax. They must look at any fine print in these sections, as they should say whether or not taxes have been taken into account.
Fees and expenses
'Mutual funds have two goals: to make money for themselves and for you, usually in that order.'- Quote from Fool.com. Entry loads, exit loads, switching charges, annual recurring expenses, management fees, investor servicing costs'these all add up over time. The OD lists the limits on these fees and also shows the impact these have had on the fund investment historically.
Key Personnel esp. Fund Managers
This section details the education and work experience of the key management of the fund company, including the CEO and the Fund Managers. Investors get an idea of the pedigree and vintage of the management team. For example, investors need to watch out for the fund that has been in operation significantly longer than the fund manager has been managing it. The performance of such a fund can be credited not to the present manager, but to the previous ones. If the current manager has been managing the fund for only a short period of time, investors need to look into his or her past performance with other funds with similar investment goals and strategies. Only then can they get a better gauge of his or her talent and investment style.
Tax benefits information
Mutual funds enjoy significant tax benefits under Sec 23 D and Sec 135 .For example, Equity funds enjoy nil long terms capital gains and nil dividend distribution tax benefits. A close reading of the tax benefits available to the fund investors will enable them to plan their taxes better and to enhance their post tax returns.
Shareholders may have access to certain services, such as automatic reinvestment of dividends and systematic investment/withdrawal plans. This section of the OD, usually near the back of the publication, will describe these services and how one can take advantage of them.
After reading the sections of the OD outlined above, investors will have a good idea of how the fund functions and what risks it may pose. Most importantly, they will be able to determine if it is right for their portfolio. If investors need more information beyond what the prospectus provides, they can consult the fund's annual report, which is available directly from the fund company or through a financial planner.
This investment of time and effort would prove very beneficial to investors.
Published on Tue, Aug 10, 2006 at 13:40 Source : Moneycontrol.com
- Ajay Bagga The writer is CEO, Lotus India AMC.
STATEMENT OF THE PROBLEM
In India, very little work has been done to investigate fund managers forecasting abilities. Active fund managers are expected to reward higher return. If the fund manager feels that market on the whole overvalued, then he would get out of the market. Hence the present study has the objective of finding out. The performance of mutual fund schemes in the framework of risk and return. (ELSS) and to suggest a best Mutual fund schemes to investor with respect his/her risk profile.
OBJECTIVE OF THE STUDY:
' To identify the risk & return involved in Mutual funds.
' To study the concept of mutual funds
' To compare the performance of different mutual funds.
' To understand the concept of Net Asset Value (NAV) and mutual fund
' To measure risk bearing capacity of an investors.
' Let know investors about which types of investor they are suggest appropriate investment strategy.
' Suggest most beneficial Mutual fund schemes to investor With respect to investor type and strategy.
The population consists of 5 old funds of risk and return of last three year the entire population has been taken in to consideration for the study.
The database was screened for funds with the following characteristics:
1. Funds with at least three years of total returns covering the calendar years 2011 through 2013.
2. The sample includes only "identifiable" fund managers. It does not include funds which list "management team" or "multiple managers" as manager because our objective is to draw inferences about the performance of managers who are well known to investors.
3. Funds that had a change in objective or investment style over the period are not included in the sample.
Need for the Study
Business concerns, corporate investors worldwide are using these new financial instruments; 'Mutual Funds' effectively to reduce substantial loss, countries have proved that these instruments can effectively reduce risk.
There has always been high volatility in Indian capital market's, which leads to very high-risk levels. So there is an absolute need to develop. This concept makes all the investors aware of its advantages and makes them use these instruments according to their needs.
To study the concept of Mutual funds such as how mutual funds have come into existence, the different types of mutual funds schemes such as open ended schemes closed ended schemes, to compare the performance of different mutual funds to understand the concept of NAV and mutual funds, to identify the different players in mutual fund industry, to compare equity funds with sensex and nifty
SCOPE OF THE STUDY:
' This study covers Equity Linked Savings Schemes (ELSS) of six AMC's.
' The study covers the period of past three years i.e. from Jan 2010 to Dec 2012.
' The study covers only open ended type.
' The study applies only two approaches to evaluate performance, namely Sharpe's Index and Jensen's Index.
The methodology is the plan, structure and strategy of the investigation process that sets out to obtain answer to the study. The methodology followed for the collecting information are using two sources of data namely
' Primary Data
' Secondary Data
The data collected first hand by the researcher concerned with the research problem refers to the Primary data.
Data related to Investor risk profile is collected by feeling up questionnaires.
The information available at various sources made for some other purpose but facilitating the study undertaken is called as Secondary Data.
The various sources that were used for the collection of secondary data are
' Various Text books were used to understand the concepts of portfolio management.
' Websites ' Various sites like www.5paise.com, www.sharekhan.com, www.amfi.com, www.bseindia.com and other websites.
' Newspapers such as Economic Times, Financial Express. Magazines such as Business World, Business Today, Investors Guide, Capital Market.
OPERATIONAL DEFINITIONS OF CONCEPTS
NET ASSET VALUE (NAV)
Net Asset Value (NAV) denotes the performance of particular scheme of a mutual fund. Mutual Funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on day-to-day basis. The NAV per unit is market value of securities of scheme divided by the total number of units of the scheme on any particular date.
Formula of the calculation of Net Asset Value (NAV)
Market Value of Investments
Net Asset Value =
No. of units Outstanding
THE CONCEPT OF RETURN
Return can be defined as the amount or rate or produce, proceeds, gain profit which accrues to an economic agent from an undertaking or enterprise or real/ financial investment. It is a reward for and a motivating force behind investment, the objective of which is usually to maximize return.
Return is said to have two components
The basic one, which is the periodic cash or income receipts, either interest or dividend. The other which is the appreciation or depreciation in the price of value of the asset, or called the capital gain or capital loss.
The total return can thus be defined as
R= Income + (-) Price Appreciation (Depreciation)
Required Rate of Return and Expected Return
The concept of required rate of return plays an important role in the valuation of assets and in both financial and real investment decisions.
The required rate of return for a security is defined as the minimum expected rate of return needed to induce or persuade an investor to purchase the security, given its risk. The required rate of return has two components:
Risk-Free rate of Return, which is the basic temporal exchange rate in the economy. It can be defined as that reward or price which is expected by an investor to induce him to forgo his present consumption in favor of future consumption plus a premium for expected inflation.
The second component is the Risk Premium. The rational risk averse investor purchasing an asset, expects to be compensated for the risk. The premium for risk must reflect all the uncertainty involved in investing in the security. Thus,
Required Rate of Return = Risk Free Rate of Return + Risk Premium
It should be noted that there are many financial assets, and therefore, many required rates of return. They are also different within a particular asset class or category. The RRR may change over a period also. The RRR and market interest rate are positively related.
RISK ' RETURN TRADE OFF
The objective of maximizing return can be pursued only at the cost of incurring higher risk. The financial markets offer a wide range of assets from very safe to very risky, with corresponding low to high returns. The investor has to consider both its return potential and risk involved while selecting the asset for investment. The empirical evidence shows that generally there is a high correlation between risk and return over a long period. The securities are generally priced such that high risk is rewarded with high return, and low risk is accompanied by a corresponding low return. This relationship is known as risk ' return trade off.
MEASUREMENT OF HISTORICAL RETURN
The total return on an investment for a given period is
Total Returns = cash payment received during the year+ Price change over the period
Price at the beginning of the period
Risk refers to the possibility that the actual outcome of an investment will differ from the expected outcome. In other words, risk refers to the variability or dispersion. If an asset's return has no variability, it is risk less. The risk of a portfolio can be measured in various ways. The two most commonly used measures of risk are
VARIANCE AND STANDARD DEVIATION
The most commonly used measure of risk in finance is variance or the standard deviation. The variance and the standard deviation of a historical return series are defined as follows:
'?? = ' (x-x')??
'?? : Variance of Return
' : Standard Deviation of Return
X : Return for the stock in period
x' : Arithmetic Return
N : Number of period
The sensitivity of a security to market movements is called beta (??). A measure of risk commonly advocated is beta. It represents the most widely accepted measure of the extent to which the return on a security fluctuates with the return on the market portfolio. It describes the relationship between the securities return and the index returns. 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. By definition, the beta for the market portfolio is 1. Beta of a portfolio can be calculated as follows
Beta (??A) = COV ( RA,RM)
RA : Return of the portfolio A
RM : Return of the market M
R'A : Average rate of return of portfolio A
R'M : Average rate of return of market M
N : Number of periods
COV (RA, RM) = ' (RA-R'A)(RM-R'M)
'??M = ' (RM-R'M)??
RISK ADJUSTED PERFORNMANCE MESURES
1. A MEAN ' VARIANCE MODEL
The simplest measures of risk ' adjusted performance have their roots in the mean ' variance framework developed by Harry Markowitz in the early 1950's, In the mean- variance world, the standard deviation of an investment measures its risk and the return earned is the reward. If you compare two investments with the same standard deviation in returns, the investment with the higher average return would be considered the better one.
2. SHARPE'S INDEX (SI)
It is the measure of risk premium related to the total risk. It gives a single value to be used for the performance ranking of various funds or portfolios. This risk premium is the difference between the portfolio's average rate of return and the risk free rate of return. The standard deviation of the portfolio indicates the risk. It assigns the highest values to assets that have best risk-adjusted rate of return.
The Sharpe ratio is a versatile measure that has endured the test of time. Its focus is on the standard deviation as the measure of risk does bias it against portfolios that are diversified widely across the market. A sector specific mutual fund (such as Pharma or Banking fund) will tend to do poorly on a Sharpe ratio basis because its standard deviation will be higher because of the presence of sector-specific. Since investors in these funds can diversify the risk by only way of holding multiple funds, it does seem unfair to penalize these funds for them.
Sharpe's Index SI given by the formulae
SI = R'A-RF
R'A : Average rate of return of Portfolio A
RF : Average rate of return on a risk-free investment
'A : Standard deviation of return of portfolio A
3. TREYNOR'S INDEX (TI)
It measures the fund's performance in relation to the market performance. To understand it better one must know about the Characteristic line. The relationship between the given market return and the fund return is given by the characteristic line. The ideal fund's return rises at a faster rate than the general market performance when the market is moving upwards and its rate of return declines slowly than the market return, in the decline.
Treynor's Index (TI) given by the formulae
TI = R'A-RF
R'A : Average rate of return of Portfolio A
RF : Average rate of return on a risk-free investment
??A : Beta of portfolio A
The absolute risk adjusted return measure was developed by Michael Jensen and commonly known as Jensen's measure. It is mentioned as 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 the security price would enable the manager to earn higher returns than the ordinary investor expects to earn in a given level of risk. The basic model of Jensen is
Jensen index = R'A-[RF+ ??A(R'M-RF)]
R'A : Average rate of return of Portfolio A
RF : Average rate of return on a risk-free investment
??A : Beta of portfolio A
R'M : Average rate of return of market M
There have been a number of studies of Mutual Fund performance using the above three indices.
TOOLS AND TECHNIQUES
' Treynor's index
' Sharpe's Index
' Jensen's Index
' Standard Deviation
LIMITATIONS OF THE STUDY
' Not all the information required was freely available.
' The study is limited to the evaluation of performance of the selected funds.
' NAV s considered for the calculations of returns is obtained from AMFI website and the same is taken as true value without verification.
Table 1: Monthly returns of SBI Magnum Tax gain and BSE 100 Index
SBI MAGNUM TAXGAIN 93
Period NAV* Fund Return Market Return (BSE 100)
Feb-11 23.88 -13.5883 -4.5398
Mar-11 24.26 1.5913 -0.8738
Apr-11 22.31 -8.0379 1.1968
May-11 24.07 7.8888 2.0355
Jun-11 20.02 -16.8259 -15.7369
Jul-11 20.84 4.1159 1.0100
Aug-11 23.38 12.1881 7.6055
Sep-11 26.39 12.8743 1.0706
Oct-11 27.26 3.2967 7.3738
Nov-11 28.98 6.3116 0.9965
Dec-11 28.85 -0.4486 12.5488
Jan-12 33.39 15.7366 7.2723
Feb-12 33.58 0.5690 -1.8561
Mar-12 36.86 9.7677 2.5810
Apr-12 38.57 4.6392 -3.5053
May-12 41.11 6.5336 -4.7134
Jun-12 45.47 12.6595 8.4771
Jul-12 37.07 -18.4737 5.0186
Aug-12 41.33 13.4918 7.3507
Sep-12 46.03 13.3719 3.0327
Oct-12 47.30 2.7591 9.2703
Nov-12 44.47 -5.9831 -8.2053
Dec-12 49.21 12.6589 12.8522
Jan-13 51.37 4.3894 6.5218
Feb-13 54.17 5.4507 5.6075
Mar-13 55.93 3.2490 3.4036
Apr-13 46.07 -17.6292 9.4358
May-13 48.89 6.1213 5.8424
Jun-13 42.53 -13.0108 -13.7077
Jul-13 40.61 -4.5145 -0.5462
Aug-13 41.44 2.0438 0.5645
Sep-13 44.72 7.9151 9.5151
Oct-13 47.26 5.6798 6.8654
Nov-13 50.13 6.0728 4.3540
Dec-13 54.70 9.1363 4.9740
Jan-14 55.65 1.7367 0.7402
* As on 1st of every month
Table 2: Calculation of Risk, Beta, Treynor, Sharpe and Jensen Measure of SBI Magnum Tax gain
Fund Return (RA) RA-R'A Return from Market (RM) RM-R'M (RA-R'A) (RM-R'M) (RM-R'M)?? (RA-R'A)??
-13.5883 -16.1921 -4.5398 -7.1452 115.695793 51.05388 262.184102
1.5913 -1.0125 -0.8738 -3.4792 3.52269 12.10483 1.02515625
-8.0379 -10.6417 1.1968 -1.4086 14.9898986 1.984154 113.245779
7.8888 5.285 2.0355 -0.5699 -3.0119215 0.324786 27.931225
-16.8259 -19.4297 -15.7369 -18.3423 356.385386 336.44 377.513242
4.1159 1.5121 1.01 -1.5954 -2.41240434 2.545301 2.28644641
12.1881 9.5843 7.6055 5.0001 47.9224584 25.001 91.8588065
12.8743 10.2705 1.0706 -1.5348 -15.7631634 2.355611 105.48317
3.2967 0.6929 7.3738 4.7684 3.30402436 22.73764 0.48011041
6.3116 3.7078 0.9965 -1.6089 -5.96547942 2.588559 13.7477808
-0.4486 -3.0524 12.5488 9.9434 -30.3512342 98.8712 9.31714576
15.7366 13.1328 7.2723 4.6669 61.2894643 21.77996 172.470436
0.569 -2.0348 -1.8561 -4.4615 9.0782602 19.90498 4.14041104
9.7677 7.1639 2.581 -0.0244 -0.17479916 0.000595 51.3214632
4.6392 2.0354 -3.5053 -6.1107 -12.4377188 37.34065 4.14285316
6.5336 3.9298 -4.7134 -7.3188 -28.7614202 53.56483 15.443328
12.6595 10.0557 8.4771 5.8717 59.0440537 34.47686 101.117102
-18.4737 -21.0775 5.0186 2.4132 -50.864223 5.823534 444.261006
13.4918 10.888 7.3507 4.7453 51.6668264 22.51787 118.548544
13.3719 10.7681 3.0327 0.5374 5.78677694 0.288799 115.951978
2.7591 0.1553 9.2703 6.775 1.0521575 45.90063 0.02411809
-5.9831 -8.5869 -8.2053 -12.7006 109.058782 161.3052 73.7348516
12.6589 10.0551 12.8522 8.3568 84.0284597 69.83611 101.105036
4.3894 1.7856 6.5218 4.0265 7.1897184 16.2127 3.18836736
5.4507 2.8469 5.6075 3.1321 8.91677549 9.81005 8.10483961
3.249 0.6452 3.4036 0.9102 0.58726104 0.828464 0.41628304
-17.6292 -20.233 9.4358 6.9405 -140.427137 48.17054 409.374289
6.1213 3.5175 5.8424 3.347 11.7730725 11.20241 12.3728063
-13.0108 -15.6146 -13.7077 -16.2031 253.004925 262.5404 243.815733
-4.5145 -7.1183 -0.5462 -3.0416 21.6510213 9.251331 50.6701949
2.0438 -0.56 0.5645 -1.9311 1.081416 3.729147 0.3136
7.9151 5.3113 9.5151 7.0198 37.2842637 49.27759 28.2099077
5.6798 3.076 6.8654 4.3701 13.4424276 19.09777 9.461776
6.0728 3.469 4.354 1.8587 6.4478303 3.454766 12.033961
9.1363 6.5325 4.974 2.4787 16.1921078 6.143954 42.6735563
1.7367 -0.8671 0.7402 -1.7551 1.52184721 3.080376 0.75186241
93.7369 93.8322 1011.7482 1471.547 3028.72127
' RA=93.7369 R'A=2.6038
' RM=93.8322 R'M=2.6064
' (RA-R'A)(RM-R'M)= 1011.7482
' (RM-R'M)??= 1471.547
' (RA-R'A)??= 3028.72
Rate of Return = (Terminal value ' Initial value)+ Dividend
Rate of Return for Jan 11(Fund) = 23.88'27.01
* 100 = -11.5883
Rate of Return for Jan 11(Market) = 2949.32-3109.58
* 100 = -4.5398
Beta (??A) = COV ( RA,RM)
??A = 0.6841
'A= ' (RA-R'A)??
'A = 6.4845
Treynor's Measure = R'A-RF
Treynor's Measure = 3.6819
Sharpe Measure = R'A-RF
Sharpe Measure = 0.3888
Jensen Measure = R'A-[RF+ ??A(R'M-RF)]
Jensen Measure = 0.794
' The overall risk of the mutual fund as measured by the Standard Deviation ('A) of the total returns of the fund returns for the period from 1 Jan 2011 to 31st Dec 2013 is 6.4845
' The Average Returns of the Mutual Fund as depicted by Arithmetic Mean (R'A) for the period from 1 Jan 2011 to 31st Dec 2013 is 2.6038.
' The Average Returns of the Market Index ' BSE 100 as depicted by Arithmetic Mean (R'M) for the period from 1 Jan 2011 to 31st Dec 2013 is 2.6064
' The Systematic Risk of the Mutual Fund as given by the ?? coefficient for the period from 1 Jan 2011 to 31st Dec 2013 is 0.6841
' Treynor's Measure for the fund for the period from 1 Jan 2011 to 31st Dec 2013 is 3.6819.
' Sharpe's Measure for the fund for the period from 1 Jan 2011 to 31st Dec 2013 is 0.3.888.
' Jensen's Measure for the fund for the period from 1 Jan 2011 to 31st Dec 2013 is 0.794.
1. The NAV of the fund has almost remained constant at around Rs. 25 for about one year i.e. 2011.
2. Then the increasing rally started, since then expect for small falls for short periods it has increased continuously.
3. During March 2013, the NAV reached high of Rs.55.93 during the period.
4. On 31 Dec 2013, its NAV was Rs. 54.70
Table 3: Monthly returns of Sundaram Tax Saver 98 and BSE 200 Index
SUNDARAM TAX SAVER 98
Period NAV* Fund Return Market Return (BSE 200)
Feb-11 32.57 -5.7340 -4.9106
Mar-11 32.91 1.0293 -0.8744
Apr-11 32.41 -1.5137 0.8713
May-11 33.13 2.2041 2.8956
Jun-11 27.52 -16.9238 -17.8831
Jul-11 27.58 0.2264 1.3633
Aug-11 29.99 8.7132 7.9599
Sep-11 30.65 2.2024 1.1660
Oct-11 32.78 6.9613 7.1390
Nov-11 33.10 0.9114 1.8407
Dec-11 36.20 9.4324 9.5204
Jan-12 39.26 8.4559 8.8566
Feb-12 38.47 -2.0177 -2.1391
Mar-12 39.46 2.5724 3.1620
Apr-12 37.56 -4.7965 -3.3842
May-12 36.16 -3.7233 -5.0406
Jun-12 39.23 8.4812 7.9193
Jul-12 40.01 1.9897 3.5157
Aug-12 41.77 4.4007 6.0787
Sep-12 43.51 4.1668 3.7285
Oct-12 46.14 6.0303 8.6071
Nov-12 43.71 -5.2660 -8.3299
Dec-12 49.30 12.7926 12.6073
Jan-13 52.25 5.9794 6.4566
Feb-13 55.44 6.1203 5.5746
Mar-13 57.49 3.6974 3.1768
Apr-13 65.32 13.6103 9.6261
May-13 67.58 3.4658 6.1638
Jun-1 56.83 -15.9160 -13.8925
Jul-13 57.60 1.3668 -1.9188
Aug-13 56.34 -2.1924 0.1414
Sep-13 61.22 8.6546 9.7890
Oct-13 62.99 2.9027 7.1361
Nov-13 65.68 4.2684 4.3597
Dec-13 68.80 4.7464 5.4619
Jan-14 69.38 0.8390 0.3358
* As on 1st of every month
Table 4: Calculation of Risk, Beta, Treynor, Sharpe and Jensen Measure of Sundaram Tax Saver 98
Fund Return (RA) RA-R'A Return from Market (RM) RM-R'M (RA-R'A) (RM-R'M) (RM-R'M)?? (RA-R'A)??
-5.7340 -7.9044 -4.9106 -7.2720 57.4806 52.8816 62.4796
1.0293 -1.1413 -0.8744 -3.2378 3.6946 12.4835 1.3021
-1.5137 -3.6822 0.8713 -1.4922 5.4947 2.2268 13.5583
2.2041 0.0337 2.8956 0.5322 0.0179 0.2832 0.0013
-16.9238 -19.1142 -17.8831 -20.2465 386.5907 411.9213 364.5880
0.2264 -1.9440 1.3633 -1.0001 1.9441 1.0001 3.7793
8.7132 6.5428 7.9599 5.5965 36.6165 31.3206 42.8079
2.2024 0.0320 1.1660 -1.1974 -0.0383 1.4337 0.0012
6.9613 4.7907 7.1390 4.7756 22.8785 22.8065 22.9506
0.9114 -1.2612 1.8407 -0.5227 0.6591 0.2732 1.5901
9.4324 7.2620 9.5204 7.1571 51.9745 51.2234 52.7366
8.4559 6.2854 8.8566 6.4933 40.8130 42.1625 39.5067
-2.0177 -4.1881 -2.1391 -4.4825 18.7730 20.1124 17.5401
2.5724 0.4020 3.1620 0.7986 0.3212 0.6377 0.1616
-4.7965 -6.9670 -3.3842 -5.7476 40.0433 33.0350 48.5384
-3.7233 -5.8938 -5.0406 -7.4040 43.6375 54.8194 34.7364
8.4812 6.3125 7.9193 5.5559 35.0607 30.8679 39.8230
1.9897 -0.1807 3.5157 1.1524 -0.2102 1.3280 0.0327
4.4007 2.2302 6.0787 3.7153 8.2860 13.8035 4.9739
4.1668 1.9964 3.7285 1.3651 2.7253 1.8636 3.9855
6.0303 3.8599 8.6071 6.2437 24.1199 38.9837 14.8986
-5.2660 -7.4364 -8.3299 -12.6933 79.5198 134.3468 55.3002
12.7926 12.6222 12.6073 8.2439 87.5683 67.9619 132.8313
5.9794 3.8110 6.4566 4.1133 15.5913 16.7548 14.5102
6.1203 3.9499 5.5746 3.2132 12.6841 12.3121 15.6017
3.6974 1.5269 3.1768 0.8134 1.2420 0.6616 2.3315
13.6103 13.4379 9.6261 7.2627 83.0701 52.7468 130.8259
3.4658 1.2953 6.1638 3.8005 4.9229 14.4435 1.6779
-15.9160 -18.1065 -13.8925 -16.2559 294.0136 264.2542 327.1399
1.3668 -0.8036 -1.9188 -4.2822 3.4413 18.3369 0.6458
-2.1924 -4.3628 0.1414 -2.2220 9.6941 4.9371 19.0344
8.6546 6.4842 9.7890 7.4256 48.1486 55.1392 42.0443
2.9027 0.7322 7.1361 4.7527 3.4801 22.5880 0.5362
4.2684 2.1180 4.3597 1.9963 4.1883 3.9854 4.4016
4.7464 2.5759 5.4619 3.1185 7.9815 9.6006 6.6355
0.8390 -1.3315 0.3358 -2.0276 2.6996 4.1312 1.7728
78.1352 85.1016 1439.1278 1481.6275 1505.2586
' RA=78.1352 R'A=2.1704
' RM=85.1016 R'M=2.3634
' (RA-R'A)(RM-R'M)= 1439.1278
' (RM-R'M)??= 1481.6275
' (RA-R'A)??= 1505.2586
Rate of Return = (Terminal value ' Initial value)+ Dividend
Rate of Return for Jan 11(Fund) = 32.57'34.56
* 100 =-5.7340
Rate of Return for Jan 11(Market) = 731.89 - 769.67
* 100 =-4.9106
Beta (??A) = COV ( RA,RM)
??A = 0.9713
'A= ' (RA-R'A)??
'A = 6.5580
Treynor's Measure = R'A-RF
Treynor's Measure = 2.1470
Sharpe Measure = R'A-RF
Sharpe Measure = 0.3180
Jensen Measure = R'A-[RF+ ??A(R'M-RF)] Jensen Measure =-0.1276
' The overall risk of the mutual fund as measured by the Standard Deviation ('A) of the total returns of the fund returns for the period from 1 Jan 2011 to 31st Dec 2013 is 6.5580.
' The Average Returns of the Mutual Fund as depicted by Arithmetic Mean (R'A) for the period from 1 Jan 2011 to 31st Dec 2013 is 2.1704.
' The Average Returns of the Market Index ' BSE 200 as depicted by Arithmetic Mean (R'M) for the period from 1 Jan 2011 to 31st Dec 2013 is 2.3634
' The Systematic Risk of the Mutual Fund as given by the ?? coefficient for the period from 1 Jan 2011 to 31st Dec 2013 is 0.9713
' Treynor's Measure for the fund for the period from 1 Jan 2011 to 31st Dec 2013 is 2.1470.
' Sharpe's Measure for the fund for the period from 1 Jan 2011 to 31st Dec 2013 is 0.3180
' Jensen's Measure for the fund for the period from 1 Jan 2011 to 31st Dec 2013 is -0.1276
1. The NAV of the fund has steadily increased over the period
2. On 31st Dec 2013 it closed at its high of Rs. 69.38 during the period.
Investor's Risk Profile
1.) WHAT IS YOUR MAJOR INVESTMENT OBJECTIVE?
' Avoid any fluctuation in the value of my investments (0) ->8
' Maintain the security of my investments with regular income to live on (10) ->13
' Maintain regular income with some exposure to capital growth (20) -> 13
' Maximise the growth of my investments (40) -> 18
2.) HOW WOULD YOU REACT IF YOUR INVESTMENTS WERE TO DECLINE IN VALUE BY 20% IN ONE YEAR?
' Withdraw all my funds immediately and move them to bank deposits. 10'6
' Withdraw part of my money and move it to an alternative strategy. 20'12
' Wait until I recovered the 20% loss and then consider alternative strategies. 20'14
' Remain invested and follow the recommended strategy. 30'12
' Increase the amount investment if possible because the market has become cheaper. 40'6
3.) AN INVESTMENT PORTFOLIO WITH HIGH EXPOSURE TO GROWTH ASSETS TENDS TO GENERATE HIGHER RETURNS, ALBEIT WITH SOME VOLATILITY. TO WHAT EXTENT ARE YOU WILLING TO EXPERIENCE VOLATILITY TO GENERATE HIGHER RETURNS?
' I'm very comfortable. I understand that to generate higher returns there is risk of fluctuation of my investments in the short term. However, over the long term, there is a low risk of capital loss. 40' 14
' I'm somewhat comfortable, assuming there is a limit to the volatility. 30'13
' I'm a little uncomfortable seeing my investments fluctuate. 20'15
' I'm much more comfortable with investments that have minimal volatility. 10'10
4.) WHICH OF THE FOLLOWING BEST DESCRIBES YOUR ATTITUDE TOWARDS INVESTMENT LOSSES?
' I would check the value of my investments several times a month and feel very uneasy if I began to lose money. 10'11
' Daily losses make me uncomfortable, but are not cause for alarm. I would, however, start to feel very uneasy if I made a loss on my investments over a 12-month period. 20'9
' I take substantial day-to-day changes in my stride. However I would start to feel very uneasy if I didn't recover any significant losses within a 1 to 2 year time frame.30'15
' If my investment suffered significant losses over a 2 year period and I still believed in my long-term strategy, I would remain fully confident of a recovery in performance.40'17
5.) WHAT IS YOUR PREFERRED STRATEGY FOR MANAGING INVESTMENT RISK?
' To have a diversified investment portfolio across a range of asset classes to minimise risk. 30'10
' I don't want to reduce it as investment risk leads to higher returns over the long-term. 40'15
' To invest mainly in capital stable investments. 10'20
' I don't understand the definition of 'investment risk'. I rely on my financial planner to achieve this. 0'7
6.) IN THE PAST, HOW WOULD YOU DESCRIBE YOUR OVERALL INVESTMENT DECISIONS?
' Not applicable. I'm a first time investor or have only ever invested via my superannuation fund. 20'8
' Good, I have stuck to stable and safe investments. 10'13
' Good, I have been rewarded for making investments that can fluctuate in value. 40'10
' Fair, however I would like to improve my returns. 20'9
' I've had some losses, but am willing to give it another go. 30'7
' I've had some losses and am reluctant to invest in anything that fluctuates in value.
7.) WHICH Of THE FOLLOWING BEST DESCRIBES YOUR UNDERSTANDING Of THE INVESTMENT MARKET?
' I am an experienced investor and constantly keep up to date with the investment market. I've had exposure to various asset classes and am fully aware of the risks involved to gain high returns.40'7
' My awareness of the financial market is limited to information passed on by my broker or financial planner. I rely on the professionals to keep me up to date.30'16
' I have little awareness of the investment market. However, I have a desire to build my knowledge and understanding.20'21
' I'm not familiar with investments or financial markets. 10'8
8.) WHAT IS YOUR WILLINGNESS TO RISK SHORTER TERM LOSSES FOR THE PROSPECT Of HIGHER LONGER TERM RETURNS?
' High. 40'10
' Moderate. 30'19
' Not sure. 20'16
' Low. 10'7
9.) HAVE YOU EVER BORROWED MONEY TO MAKE AN INVESTMENT OTHER THAN YOUR OWN HOME Eg. INVESTMENT PROPERTY, HOLIDAY HOME, SHARE PORTFOLIO, MARGIN LOAN ETC?
' No. 0'20
' Yes. 30'8
' No, but I'm willing to consider it now. 20'14
' Yes, but I'm not prepared to borrow at the moment to invest. 10'10
FINDINGS AND SUGGESTION
SUMMARY OF FINDING'S
BIRLA SUNLIFE TAX RELIEF 96;
Average Returns (R'A) 1.4458
Market Average Return ( R'M) 2.3634
Standard Deviation ('A) 8.3550
Beta (??) 0.9296
1. The average return of the fund (R'A) is lower than that of the average market return (R'M) which indicates that the fund is not performing well as compared to the market.
2. The Standard Deviation of 8.3550 indicates the amount of risk involved in investing in the fund.
3. The fund's beta of 0.9296 is relatively lower than that of the market index (1, by definition), which gives the idea that the proportionate change in the fund resulting from the change in the market index is relatively low.
FRANKLIN INDIA TAXSHIELD;
Average Returns (R'A) 5.4412
Market Average Return ( R'M) 2.3742
Standard Deviation ('A) 29.3064
Beta (??) 0.8778
4. The average return of the fund (R'A) is higher than that of the average market return (R'M) which indicates that the fund is performing well as compared to the market.
5. The Standard Deviation of 29.3064 indicates the amount of risk involved in investing in the fund. The risk involved in investing in this fund is too high.
6. The fund's beta of 0.8778 is relatively lower than that of the market index (1, by definition), which gives the idea that the proportionate change in the fund resulting from the change in the market index is relatively low.
HDFC TAX SAVER
Average Returns (R'A) 3.7647
Market Average Return ( R'M) 2.3742
Standard Deviation ('A) 6.7354
Beta (??) 0.9310
7. The average return of the fund (R'A) is higher than that of the average market return (R'M) which indicates that the fund is performing well as compared to the market.
8. The Standard Deviation of 6.7354 indicates the amount of risk involved in investing in the fund.
9. The fund's beta of 0.9310 is relatively lower than that of the market index (1, by definition), which gives the idea that the proportionate change in the fund resulting from the change in the market index is relatively low.
SBI MAGNUM TAXGAIN 93
Average Returns (R'A) 2.4360
Market Average Return ( R'M) 2.4953
Standard Deviation ('A) 8.9689
Beta (??) 0.6841
10. The average return of the fund (R'A) is almost equal to the average market return (R'M).
11. The Standard Deviation of 8.9689 indicates the amount of risk involved in investing in the fund.
12. The fund's beta of 0.6841 is lower than that of the market index (1, by definition), which gives the idea that the proportionate change in the fund resulting from the change in the market index is low and the fund is less volatile compared to the market.
SUNDARAM TAX SAVER 98
Average Returns (R'A) 2.1704
Market Average Return ( R'M) 2.3634
Standard Deviation ('A) 6.5580.
Beta (??) 0.9713
13. The average return of the fund (R'A) is less than that of the average market return (R'M).
14. The Standard Deviation of 6.5580 indicates the amount of risk involved in investing in the fund.
15. The fund's beta of 0.9713 is almost equal to that of the market index (1, by definition), which gives the idea that the proportionate change in the fund resulting from the change in the market index is almost equal and the fund moves almost in tandem with the market.
BIRLA SUNLIFE TAX RELIEF 96 1.4638 V
FRANKLIN INDIA TAXSHIELD 6.1218 I
HDFC TAX SAVER 3.9534 II
SBI MAGNUM TAXGAIN 93 3.4364 III
SUNDARAM TAX SAVER 98 2.1470 IV
16. Franklin India Taxshield ranks top among the funds because of the high risk premium i.e. 5.3562 and low market related risk i.e. 0.8778.
17. Though SBI Magnum Tax gain 93 has low market related risk it has been ranked third because of low risk premium
BIRLA SUNLIFE TAX RELIEF 96 0.1629 V
FRANKLIN INDIA TAXSHIELD 0.1828 IV
HDFC TAX SAVER 0.5463 I
SBI MAGNUM TAXGAIN 93 0.2621 III
SUNDARAM TAX SAVER 98 0.3180 II
18. HDFC Tax Saver fund ranks top among the funds because of the higher return and less risky.
19. Though Franklin India Taxshield has a high return compared to other funds it is ranked fifth because of high amount of risk involved in investing in the fund.
BIRLA SUNLIFE TAX RELIEF 96 -0.7572 V
FRANKLIN INDIA TAXSHIELD 3.3466 I
HDFC TAX SAVER 1.5490 II
SBI MAGNUM TAXGAIN 93 0.7020 III
SUNDARAM TAX SAVER 98 -0.1276 IV
20. Among the risk adjusted performance of the portfolios Franklin India Tax shield is the best.
Investors Risk Profile
No of Respondent Score Profile
0 Under 50 Cash
0 50-110 Conservative
7 111-160 Cautious
25 161-210 Moderately conservative
13 211-260 Balanced
3 261-310 Moderately aggressive
2 311-350 Aggressive
' The investors who are ready to take risk can invest in Franklin India Taxshield has the risk associated with it is too high and the return is also high. The predictive ability represented by Jensen's Index is also quite good and gives an idea that the fund manager has a good ability of predicting the market and then investing. So you can have faith in the fund manager.
' The investors who are not much interested in taking risk can invest in HDFC Tax Saver as the risk associated with this fund is less and the returns are also good but not as high as that of Franklin India Taxshield. As the fund is able to earn high returns with low risk, we can say that the fund as been managed very well.
' The investors can also invest in SBI Magnum Taxgain 93 has it has been ranked third among all the measures but the returns will be moderate compared to Franklin and HDFC.
' As the Tata Tax Savings Fund is highly volatile, investors are not recommended invest in this fund.
Suggestions for investors
' Investor do need to know about various options of investment.
' They do not need to only concentrate about returns, safety and rate of return should be taken in to consideration.
' Investment should be diversified in nature.
' They should always go for investment which gives them return on a fixed time of period.
' Investor should always concern about new investment profiles and products so, the investment can give maximum return.
' Before Choosing company for investment should study past 3 -5 years performance
The asset base rose by Rs 58,013 crore in April. March had seen a marginal decline in the assets under management of the industry.
The mutual fund industry as we have seen has been through testing phase in its evolution. It has seen a sudden mushrooming of several asset management companies soon after the opening up of the industry for private players, the debacle of UTI, and its low recovery and the optimism of the new generation fund mangers who believe that they can indeed beat the market and diversify away the risk very efficiently. Investors today have to bear outrageous plans of various AMC's that they have magic portfolio, which can give tailor made returns than risks.
In this study an attempt was made to look into the logic behind the claims that these AMC's boldly make theoretically with a broad prospective. Broadly various concepts like the risk-return relationship and various performance evaluation methods were floated with an intention to facilitate even an ordinary investor with elementary knowledge of statistics to understand them.
Based on the inferences from the analytical study of the performance of the fund some suggestions were made to the investor.
The future of the mutual fund industry in India is very bright and is going to be very preferred investment options for an investor in the coming future. It looks to take over the other avenues of investment available to the investor due to its high returns and professional management, which is lowering the risk.
1 What is your major investment objective? Score
Avoid any fluctuation in the value of my investments. 0
Maintain the security of my investments with regular income to live on. 10
Maintain regular income with some exposure to capital growth. 20
Maximize the growth of my investments. 40
2 How would you react if your investments were in decline in value by 20% in one year?
Withdraw all my funds immediately and move them to bank deposits. 10
Withdraw part of my money and move it to an alternative strategy. 20
Wait until I recovered the 20% loss and then consider alternative strategies. 20
Remain invested and follow the recommended strategy. 30
Increase the amount investment if possible because the market has become cheaper. 40
3 An investment portfolio with high exposure to growth assets tend to generate higher return, albeit with some volatility, To what extent are you willing to experience volatility to generate higher return?
I'm very comfortable. I understand that to generate higher returns there is risk of fluctuation of my investments in the short term. However, over the long term, there is a low risk of capital loss. 40
I'm somewhat comfortable, assuming there is a limit to the volatility. 30
I'm a little uncomfortable seeing my investments fluctuate. 20
I'm much more comfortable with investments that have minimal volatility. 10
4 Which of the following best describes your attitude toward investment losses?
I would check the value of my investments several times a month and feel very uneasy if I began to lose money. 10
Daily losses make me uncomfortable, but are not cause for alarm. I would, however, start to feel very uneasy if I made a loss on my investments over a 12-month period. 20
I take substantial day-to-day changes in my stride. However I would start to feel very uneasy if I didn't recover any significant losses within a 1 to 2 year time frame. 30
If my investment suffered significant losses over a 2 year period and I still believed in my long-term strategy, I would remain fully confident of a recovery in performance. 40
5 What is your proffered strategy for managing investment?
To have a diversified investment portfolio across a range of asset classes to minimize risk.
I don't want to reduce it as investment risk leads to higher returns over the long-term. 40
To invest mainly in capital stable investments. 10
I don't understand the definition of 'investment risk'. I rely on my financial planner to achieve this. 0
6 In the past, how would you describe your overall investment decision?
I don't understand the definition of 'investment risk'. I rely on my financial planner to achieve this. 20
Good, I have stuck to stable and safe investments. 10
Good, I have been rewarded for making investments that can fluctuate in value. 40
Fair, however I would like to improve my returns. 20
I've had some losses, but am willing to give it another go. 30
I've had some losses and am reluctant to invest in anything that fluctuates in value. 0
7 Which of the best describe your understanding of theinvestment Market?
I am an experienced investor and constantly keep up to date with the investment market. I've had exposure to various asset classes and am fully aware of the risks involved to gain high returns. 40
My awareness of the financial market is limited to information passed on by my broker or financial planner. I rely on the professionals to keep me up to date. 30
I have little awareness of the investment market. However, I have a desire to build my knowledge and understanding. 20
I'm not familiar with investments or financial markets. 10
8 What is your willingness to risk shorter term losses for the prospect of higher longer term return?
Not sure 20
9 Have you ever borrowed money to make an investment other than your own home
No, but I'm willing to consider it now. 20
Yes, but I'm not prepared to borrow at the moment to invest. 10
SCORE RISK PROFILE DESCRIPTION
Under 50 Cash Protection of capital or certainty of income is your only objective. You do not wish to attain
higher returns if your capital is at risk.
50-110 Conservative You are a defensive investor. You are willing to consider less risky assets, mainly cash only and
(20%-30% growth assets) some fixed interest investments. You are prepared to accept lower returns to protect the value
of your capital.
111-160 Cautious You are a cautious investor seeking a combination of income and growth, but risk must
(35%-45% growth assets) continue to be low. Therefore, you will maintain a greater weighting to defensive assets within
your portfolio, but, will consider including some of the less aggressive growth investments.
Generally you are willing to chase improved short-term returns while accepting some, limited
161-210 Moderately conservative You are an investor seeking a combination of income and growth from your investment
(50%-60% growth assets) portfolio. Generally, you are willing to chase medium to long-term goals while accepting the
risk of short to medium-term negative returns. Your investment mix is likely to include an equal
mix of the defensive assets and growth assets such as equities and property.
211-260 Balanced You are a growth investor. You are willing to consider assets with higher volatility in the
(65%-75% growth assets) short-term (such as equities and property) to achieve capital growth over the medium to
longer term. Your investment mix will comprise a greater share of growth assets.
261-310 Moderately aggressive You are a growth investor. Prepared to accept higher volatility in the short to medium term,
(80%-90% growth assets) your primary concern is to accumulate growth assets over the long term. Your investment mix
will spread across all asset sectors but will mainly consist of more aggressive investments.
311-350 Aggressive Your primary objective is capital growth. You are an aggressive growth investor and are
(95%-100% growth prepared to compromise your portfolio balance to pursue greater long-term returns. You are
assets) Willing to accept higher levels of risk. Fluctuation in capital is acceptable in the short-medium
term for the greater potential for wealth accumulation. With the exception of a minimal level
of cash for liquidity purposes, your investment mix will only consist of growth assets such as
international and domestic equities.
1. Referred by following books
Sl No Book Author Publisher
1 Investment Analysis and Portfolio Management Prasanna Chandra 5th reprint, 2003 Tata McGraw-Hill
2 Investment Management (Security Analysis and Portfolio Management), V.K.Bhalla 7th Edition, S.Chand & Co
3 Security Analysis and Portfolio Management Punithavathy Pandian 2nd Reprint, 2003, Vikas Publishing House
4 Investment Analysis and Portfolio Management Frank K Reilly, Keith C Brown 7th Edition, Thomson South Western
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