“A Study on Investor Preferences towards Various Mutual Funds” A report submitted towards the partial fulfilment of the requirements of the two years full time Post Graduate Diploma in Management
Submitted by: Vikas Gaba Post Graduate Diploma in Management 2K7/PGPM/D52 (2007-09)
Asia Pacific Institute of Management Studies New Delhi
ACKNOWLEDGEMENT
1
I Thank Asia Pacific Institute of management Studies for giving me an opportunity to undertake my project work and for giving me knowledge in the field of finance during my two months summer internship I express my sincere and humble gratitude to Mr. Sumit Rastogi, for being my project and Industry guide and educating me to make this project a great success. I would like to thank Mr. Purshottam Sharna for his valuable guidance and support in completion of my project. I would express my sincere thanks to all the staff members of Religare Securities ( Mr. Santosh Kumar, Mr. Parbash, Mr. Fariyaad Hussain, Mr. Muniraj Singh and Many more more.. .... with withou outt thei theirr supp suppor ortt this this proj projec ectt woul would d not not have have been been a success. Last Last but but not not the the Leas Leastt i woul would d like like to than thank k thos those e pers person on whos whose e encouragement and ideas enriched my project.
Vikas Gaba
TABLE OF CONTENT
2
ACKOWLEDGEMENT OBJECTIVE OF STUDY INTRODUCTION MUTUAL FUND INDUSTRY COMPANY’S PROFILE CONCEPT OF MUTUAL FUNDS EVOLUTION OF MUTUAL FUNDS BENEFITS OF INVESTING IN MFs MAJOR MUTUAL FUND COMPANIES INDIA VARIOUS TYPES OF MFs RESEARCH METHODOLOGY RESEARCH HYPOTHESIS OBSERVATIONS RESULTS ANALYSIS CONCLUSION RECOMMENDATIONS ABSTRACT ANNEXURE BIBLIOGRAPHY / WEBLIOGRAPHY
3
OBJECTIVE Starting out as an industry with a single player, the UTI, in 1963, the mutual fund industry in India has come a long way since then. Today, close to 32 players, offering over 756 schemes, dot the industry landscape. The industry has gained enormously in size as reflected in its assets under management which now: Asset Under Managemen Category
t as
on
May
31 , 2008 A B
C
Bank Sponsored 90719 Institutions 18649 Private Sector & Joint Venture : Indian 190170 Predominantly Foreign
73525
Predominantly Indian
192744
Grand Total (B+C+D)
565807
So today, there is large no. of options for an investor to invest in Mutual Funds. So, my objective here is: TO STUDY INVESTORS’ NEEDS i.e. how much risk can they afford, how much returns they expect on their investment, for what time can they 4
invest and based on their profile, to study, what kind of funds should they invest in. To analyze different funds on the basis of their of their risk, returns they give over different time periods & their return-risk ratio, so as to find out which kind of funds (Equity, debt or sectoral funds) are suitable to investors during volatile or normal times.
INTRODUCTION
5
Definition: Mutual Fund A mutual fund is a trust that pools savings of investors who share a common financial goal and then invests in market instruments such as shares, debentures and other securities. The income earned through these investments are shared by its unit holders in proportion to the number of units owned by them making it highly suitable investment option for the common man. A mutual fund provides for an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. Acc to SEBI guidelines Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing in securities in accordance with the objectives as disclosed in offer document. The profits or losses are share by investors in proportion to their investments.
6
Structure of Mutual Funds
7
Sponsor Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund. Sponsor must contribute at least 40% of the net worth of the Investment Managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.The Sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund.
8
Trust Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). The main responsibility of the Trustee is to safeguard the interest of the unit holders and inter alia ensure that the AMC functions in the interest of investors and in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the provisions of the Trust Deed and the Offer Documents of the respective Schemes. At least 2/3rd directors of the Trustee are independent directors who are not associated with the Sponsor in any manner. Asset Management Company The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the Mutual Fund. At least 50% of the directors of the AMC are independent directors who are not associated with the Sponsor in any manner. The AMC must have a net worth of at least 10 crore at all times. Registrars and Transfer Agents
9
The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to the Mutual Fund. The Registrar processes the application
form,
redemption
requests
and
dispatches
account
statements to the unit holders. The Registrar and Transfer agent also handles communications with investors and updates investor records. Mutual funds have been around for more than half a century but they remain a marginal investment vehicle in India until the beginning of the 90's. Ever since, we have observed a real boom in their development and academics have begun to pay great attention to them. Mutual Funds fascinate because of the high return provided by them along
with the benefits of Professional management and risk diversification. Various researches have been conducted to explore the different facets of Mutual Funds such as returns and risk factors and the Drivers of Performance. Now there exist several powerful Brands in mutual fund industry such as Fidelty, Franklin Templeton and S.B.I Mutual Funds. Starting out as an industry with a single player, the UTI, in 1963, the mutual fund industry in India has come a long way since then. Today, close to 32 players, offering over 756 schemes, dot the industry landscape. The industry has gained enormously in size as reflected in its assets under management which now Starting out as an industry with a single player, the UTI, in 1963, the mutual fund industry in India has come a long way since then. Today, close to 32 players, offering over 756 schemes, dot the industry 10
landscape. The industry has gained enormously in size as reflected in its assets under management which now Asset Category
Under
Management as on May 31 , 2008
A B
C
Bank Sponsored Institutions Private Sector & Joint Venture : Indian
90719 18649
Predominantly Foreign
73525
Predominantly Indian
192744
Grand Total (B+C+D)
565807
190170
The journey of the industry has been nothing less than spectacular, particularly in the last 5 years or so. A host of factors has contributed to the phenomenal growth of the industry. First and foremost, as a result of the increased competition, industry players have focused on product innovation to drive growth. This has not only helped the industry players to tap the latent needs of the investors, but also enabled them to expand markets as more and more investors, including retail investors, have begun to look at mutual funds as a suitable investment avenue. Second, the need for greater market penetration has forced industry players to devise innovative channels of delivery to gain and strengthen 11
their market share. Today, we see new channels and models of distribution emerging as the race among the fund houses heats up to enhance reach to potential investors. Third, a slew of tax incentives, which include rationalizing of capital gains tax, aiming to boost equity investing coupled with a benign interest rate regime have helped mutual funds gain popularity with investors. Finally, a slew of regulatory measures taken by SEBI have played a crucial role in instilling confidence among investors, especially retail investors. No doubt these factors have attributed significantly to the growth of the mutual fund industry in the country, particularly in recent times. Further, the emergence of India as a major investment destination has done a world of good to the mutual fund industry in the country as it is witnessing entry of many big names in the global investment management business. The entry of major global players like Morgan Stanley, Principal, Sunlife, and Fidelity, while Vanguard is mulling over its India debut, augurs well for the industry as not only these global investment management firms bring with them the expertise gained internationally but also bring the best international practices in terms of performances and investor services which will benefit the industry and will go a long way in helping it catch up with its counter parts in developed markets like the US and the UK.
12
A host of things suggests that the industry is all set to enter a period of high growth. A robust economy, fledgling stock market, increasing awareness and acceptance of mutual funds among investors, strong domestic currency, and healthy corporate performances are among some of the major factors which suggest that the industry's future is bright. However, to gain size, and catch up with developed markets like the US, the industry has to remove certain obstacles which pose significant challenges. The Flow Chart below describes broadly the working of a Mutual Fund
13
REVIEW OF LITERATURE
14
Research in mutual fund industry has grown to a considerable extent. A number of key papers has been written exploring the different aspects but still some areas are under study such as how to rate the different Asset Management Companies, how to design assured return products, how the investors making investment in Mutual Funds. What are the factors which affects customer’s decision during investment in Mutual fund? This part reviews preceding works attempting to answer these issues. Most research on mutual funds has employed two explanatory variables, namely, risk and return. This approach implicitly places no valu value e on othe otherr pote potent ntia iall lly y impo import rtan antt attr attrib ibut utes es of the the mutu mutual al fund fund inve invest stme ment nt deci decisi sion on.. In keep keepin ing g with with this this stri strict ctly ly econ econom omic ic fram frame, e, several scholars have investigated whether or not mutual funds outperform the market. The existing “Behavioural Finance” studies are very few and very little information is available about investor perceptions, preferences, attitudes and behaviour. All efforts in this direction are fragmented. 15
Ippolito (1992) says that fund/scheme selection by investors is based
on past performance of the funds and money flows into winning funds more rapidly than they flow out of losing funds. Goetzman
(1997)
states that there is evidence that investor
psychology affects fund/scheme selection and switching. De Bondt and Thaler (1985)
while investigating the possible
psychological basis for investor behaviour, argue that mean reversion in stock prices is an evidence of investor over reaction where investors overemphasise recent firm performance in forming future expectations. In India, one of the earliest attempts was made by NCAER in 1964 when a survey survey of househ household olds s was undert undertake aken n to unders understan tand d the attitu attitude de towards and motivation for saving of individuals. Another NCAER study in 1996 analysed the structure of the capital market and presented the views and attitudes of individual shareholders. SEBI – NCAER Survey (2000) was carried out to estimate the number
of households and the population of individual investors, their economic and demographic profile, portfolio size, and investment preference for equity as well as other savings instruments. Behaviour is a reaction to a situat situation ion.. So as situat situation ion change changes, s, behavi behaviou ourr gets gets modifi modified. ed. Hence, Hence, findings and predictions of behaviour studies should be viewed accordingly).
16
Kulshreshta (1994) offers certain guidelines to the investors in
selecting the mutual fund schemes. Shanmugham (2000) conducted a survey of 201 individual investors
to study the information sourcing by investors, their perceptions of various investment strategy dimensions and the factors motivating share investment decisions, and reports that among the various factors, psychological and sociological factors dominated the economic factors in share investment decisions. Madhusudhan V Jambodekar (1996) conducted a study to assess
the awareness of MFs among investors, to identify the information sources influencing the buying decision and the factors influencing the choice of a particular fund. The study reveals among other things that Income Schemes and Open Ended Schemes are more preferred than Growth Schemes and Close Ended Schemes during the then prevalent market conditions. Investors look for safety of Principal, Liquidity and Capital appreciation in the order of importance; Newspapers and Magazines are the first source of information through which investors get to know about MFs/Schemes and investor service is a major differentiating factor in the selection of Mutual Fund Schemes. Sujit Sikidar and Amrit Pal Singh (1996) carried out a survey with
an objective to understand the behavioural aspects of the investors of the North Eastern region towards equity and mutual funds investment portfolio. The survey revealed that the salaried and self employed 17
formed the major investors in mutural fund primarily due to tax concessions. UTI and SBI schemes were popular in that part of the country then and other funds had not proved to be a big hit during the time when survey was done. Anjan Chakarabarti and Harsh Rungta (2000)
stressed the
importance of brand effect in determining the competitive position of the AMCs. Their study reveals that brand image factor, though cannot be easily captured by computable performance measures, influences the investor’s perception and hence his fund/scheme slection. Since 1986, a number of articles and brief essays have been published in financial dailies, periodicals, professional and research journals, explaining the basic concept of Mutual Funds and highlight their importance in the Indian capital market environment. They touch upon varied aspects like Regulation of Mutual Funds, Investor expectations, Investor protection, Trend in growth of Mutual Funds and some are critical views on the performance and functioning of Mutual Funds. Segmentation of investors on the basis of their characteristics was highlighted by Raja Rajan (1997). Investor’s characteristics on the basis of their investment size Raja Rajan (1997), and the relationship between stage in life cycle of the investors and their investment pattern was studied Raja Rajan (1998).
18
From the above review it can be inferred that Mutual Fund as an investment vehicle is capturing the attention of various segments of the society, like academicians, industrialists, financial intermediaries, investors and regulators
or varied reasons and deserves an indepth
study. In this paper, an attempt is made by the author, mainly to study the factors which influence the investors in their selection of the fund/scheme.
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COMPANY PROFILE
Group Overview Pharmaceutical
Financia Health Care
s
20
IT l
Religare, a Ranbaxy promoter group company, is one of India’s largest and fastest growing is one of the leading integrated financial services institutions of India. 6 Regional offices 25 Zonal Offices Present in 1300 location all over India Present in 400 Cities & Towns Total group employees 6,500 plus Present in Retail, Wealth and Institutional Spectrum Among the largest Retail brokerage branch network, present beyond Tier-I and Tier-II cities in India Overseas presence established in London, with aggressive plans of straddling other parts of the globe in this financial year.
Vision - To build Religare as a globally trusted brand in the financial services domain and present it as the ‘Investment Gateway of India’ Mission - To provide financial care driven by the core values of diligence & transparency Brand Essence - Our Core essence is diligence and we are driven by ethical and dynamic processes for wealth creation.
Name Religare is a Latin word that translates as 'to bind together'. The Religare name is paired with the symbol of a four-leaf clover. The four-leaf clover is used to define the rare quality of good fortune that is the aim of every financial plan.
21
The first leaf of the clover represents Hope. The aspirations to succeed. The dream of becoming. Of new possibilities. It is the beginning of every step and the foundations on which a person reaches for the stars.
The second leaf of the clover represents Trust. The ability to place ones own faith in another. To have a relationship as partners in a team. To accomplish a given goal with the balance that brings satisfaction to all not in the binding but in the bond that is built.
The third leaf of the clover represents Care. The secret ingredient that is the cement in every relationship. The truth of feeling that undeJrlines sincerity and the triumph of diligence in every aspect. From it springs true warmth of service and the ability to adapt to evolving environments with consideration to all.
The fourth and final leaf of the clover represents Good Fortune. Signifying that rare ability to meld opportunity and planning with circumstance to generate those often looked for remunerative moments of success.
Hope. Trust. Care. Good fortune. All elements perfectly combine in the emblematic and rare, four-leaf clover to visually symbolize the values that bind together and form the core of the Religare vision.
22
Religare Religare
Religare
Wealth
Securities
Finvest Ltd
Management Religare Services Ltd
Ltd Religare
Capital
Commodities
Religare
Ltd Religare
Ltd
Enterprises
Religare
Insurance Broking Ltd
Finance Ltd Religare Venture Capital
Religare Pvt
Realty Ltd
Ltd Most of the subsidiaries have come into existence after 2005.
Religare Enterprises Limited Religare Securities Limited Equity Broking Portfolio Management Services Depository Online Investment Portal Institutional Equity Broking Religare Finvest Limited Lending and Distribution business Religare Commodities Limited 23
Markets Ltd
Commodity Business Religare Insurance Broking Limited Life and Non Life Insurance Reinsurance Religare Capital Markets Limited Investment Banking SEBI Registered Merchant Banker Acquisition in UK through an international arm Religare Arts Initiative Limited Art Fund and other businesses of Art Gallery to be launched soon Religare Realty Limited Real Estate Management Company Religare Venture Capital Private Limited Private Equity and Investment Manager
24
New Initiatives
Religare Enterprises Limited and Vistaar Entertainment Ventures Private Limited launched India’s first ever film fund - Vistaar Religare Film Fund (VRFF) for the Film/Media business.
Religare Macquarie Wealth Management Limited 50: 50 joint venture with Macquarie for wealth management business
Religare AEGON AMC 50:50 Joint Venture between REL and Aegon for Asset Management business in India.
25
AEGON Religare Life Insurance Life Insurance Company, Joint Venture between REL, Aegon and BCCL for Life insurance business in India .
Products
Equity Arts
Commodit
Initiative
y
Investmen Mutual
t
REL Fund
Banking Wealth Insurance
Advisory Personal Services Credit
26
Religare Securities Limited (RSL) is a leading equity and securities firm in India. The major activities and offerings of the company today are Equity broking, Depository Participant Services, Portfolio Management Services, Institutional Brokerage & Research, Investment Banking and Corporate Finance.
Client Interface Retail Spectrum- To cater to a large number of retail clients by offering all products under one roof through the Branch Network and Online mode
Equity and Commodity Trading
Personal Financial Services Mutual Funds Insurance Saving Products Personal Credit Personal Loans Loans against Shares Online Investment Portal
27
Institutional Spectrum- To Forge & build strong relationships with Corporate Client and Institutions
Institutional Equity Broking
Investment Banking Merchant Banking Transaction Advisory Corporate Finance
Wealth Spectrum - To provide customized wealth advisory services to High Net worth Individuals Wealth Advisory Services
Portfolio Management Services International Advisory Fund Management Services Priority Client Equity Services Arts Initiative
Retail Spectrum
28
Wide Reach
Present in more than 1200 locations all over India Present in 400 Cities & Towns More
than
150%
increase
in
penetration in the current fiscal Large Client Base
2.75 Lac + Clients More than 150% increase in client base in 2006-07
Market Share
Equity Broking: 4.5% - 5.5% of the Market Turnover Commodity Broking: 3-4% of the Market Turnover Online Investment: 8% of the Market Turnover Almost 100% increase in Market Share since last fiscal
Dedicated Sales Force
Equity and Commodity: 2400 Online Investment: 900 PFS: 300 Insurance: 140
29
Personal Credit: 120 More More than than 250% 250% incr increas ease e in retai retaill sales
work
force
over
the
last
financial year
Key Facts Official Launch of E-broking in August 2006 Aggr Aggres essi sive ve grow growth th has has been been obse observ rved ed in the the clie client nt base base for for onli online ne trading Acquired market share of 8% in internet trading volumes * Recently launched a revamped, unique 360 degrees customer centric online trading portal To incr increa ease se team team stre streng ngth th to 3000 3000 empl employ oyees ees pure purely ly for for inte intern rnet et trading Targeting 300,000 online clients by the end of this financial year
30
Rising Number of online clients
Mar-07 Feb-07 Jan-07 Dec-06 Nov-06 Oct-06 Sep-06 Aug-06 0
31
5000
10000
15000
20000
25000
30000
35000
In $ mn
Rising Turnover
Personal Financial Services PFS caters to the financial needs of individuals by advising them on various financial plans Financial planning for retail investment is not widespread in India PFS PFS was was star starte ted d to targ target et the the rapi rapidl dly y expa expand ndin ing g midd middle le net net wort worth h individuals (MNI’s) in India Rapid rollout of PFS Products offering, such as mutual funds, life and genera generall insura insurance nce,, fixed fixed income income,, small small saving savings s instru instrumen ments, ts, capita capitall bonds and equity IPOs Expert group of Religare’s PFS advisors provide high quality customized solutions Dedicated Team of more than 200 advisors, to be expanded to 800 by March 2008 Rising MF Collections for both Debt & Equity
32
Product –Wise Clients
33
Concept Of Mutual Funds
34
History (Global) of Mutual Funds The first open-end mutual fund, Massachusetts Investor Trust was founded on March 21, 1924, and after one year had 200 shareholders and $392,000 in assets. The entire industry, which included a few closeend funds, represented less than $10 million in 1924. The stock market crash of 1929 slowed the growth of mutual funds. In response to the stock market crash, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require that a fund be registered with the SEC and provide prospective investors with a prospectus. The SEC (U.S. Securities and Exchange Commission) helped create the Investment Company Act of 1940 which provides the guidelines that all funds must comply with today. In 1951, the number of funds surpassed 100 and the number shareholders exceeded 1 million. Only in 1954 did the stock market finally rise above its 1929 peak and by the end of the fifties there were 155 mutual funds with $15.8 billion in assets. In 1967 funds hit their best year, one quarter earning at least 50 % with an average return of 35
67 %, but it was done by cheating using borrowed money, risky options, and pumping up returns with privately traded “letter stock. By the end of the 60’s there were 269 funds with a total of $48.3 billion. With renewed confidence in the stock market, mutual funds began to blossom. By the end of the 1960’s there were around 270 funds with $48 billion in assets. The first retail index fund was released in 1976, called the First Index Investment Trust. It is now called the Vanguard 500 Index fund and is one of the largest mutual funds ever with the in excess of $100 billion in assets. As of April 2006, there are 8606 mutual funds that belong to the Investment Company Institute (ICI), the national association of Investment Companies in the United States. PHASES OF MUTUAL FUNDS (in India) The Mutual Fund industry started in India with the setting up of UTI in 1964 by R.B.I. Its development can be described into four Phases as follows: First Phase-1964-87 Unit Trust of India 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 RBI and the Industrial Development Bank 36
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 1998 UTI had Rs 6700 crore 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. SBI Mutual fund was the first non-UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec87). At the end of 1993, the mutual fund industry had assets under management of Rs. 47,004 crores. Third Phase-1993-2003 (Entry of Private Sector Funds): The third phase saw the entry of private and foreign sectors in mutual fund industry in 1993 with Kothari pioneer mutual fund (now merged with Franklin Templeton) being set up as the first private sector fund. With the entry of private sector funds in 1993, a new era started in the Indian Mutual Fund industry, giving the Indian investor 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 opening up of the asset management business to private sector in 1993 saw international players like Morgan Stanley and Jardine Fleming etc.
37
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulation 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. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs. 44,541 crores of assets under management was way ahead of other mutual funds.
Fourth Phase-since February 2003: In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into separate entities. One is the specified undertaking of the Unit Trust of India with assets under management of Rs. 29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme and certain other schemes. The specified Undertaking of Unit Trust of India, functioning under an administrator 38
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 in March 2000 more than 76,000 Crores of Assets under Management and with the setting up of a UTI Mutual Fund, confirming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth, as at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.
Benefits of Mutual Fund investment
39
Professional Management: Mutual Funds provide the services of
experienced
and
skilled
professionals,
backed
by
a
dedicated
investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme. Diversification: Mutual Funds invest in a number of companies across
a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own. Convenient Administration: Investing in a Mutual Fund reduces
paperwork and helps you avoid many problems such as bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient. Return Potential: Over a medium to long-term, Mutual Funds have the
potential to provide a higher return as they invest in a diversified basket of selected securities. Low Costs: Mutual Funds are a relatively less expensive way to invest
compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.
40
Liquidity: In open-end schemes, the investor gets the money back
promptly at net asset value related prices from the Mutual Fund. In closed-end schemes, the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facility of direct repurchase at NAV related prices by the Mutual Fund. Transparency: Investors get regular information on the value of your
investment in addition to disclosure on the specific investments made by the scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook. Flexibility: Through features such as regular investment plans, regular
withdrawal
plans
and
dividend
reinvestment
plans,
one
can
systematically invest or withdraw funds according to your needs and convenience. Affordability: Investors individually may lack sufficient funds to invest
in high-grade stocks. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy.
Choice of Schemes: Mutual Fund offers a family of schemes to suit
your varying needs over a lifetime. This offers investors to further diversify their investments.
41
Well Regulated: All Mutual Funds are registered with SEBI and they
function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI.
Limitation of Mutual Fund Investment No Control Over Cost: An Investor in mutual fund has no control over
the overall costs of investing. He pays an investment management fee (which is a percentage of his investments) as long as he remains invested in fund, whether the fund value is rising or declining. He also has to pay fund distribution costs, which he would not incur in direct investing. However this only means that there is a cost to obtain the benefits of mutual fund investing. 42
services. This cost is often less than the cost of direct
No Tailor-Made Portfolios: Investing through mutual funds means
delegation of the decision of portfolio composition to the fund managers. The very high net worth individuals or large corporate investors may find this to be a constraint in achieving their objectives. However, most mutual fund help investors overcome this constraint by offering large no. of schemes within the same fund. Managing A Portfolio Of Funds: Availability of large no. of funds can
actually mean too much choice for the investors. He may again need advice on how to select a fund to achieve his objectives. AMFI has taken initiative in this regard by starting a training and certification
program for prospective Mutual Fund Advisors. SEBI
has made this certification
compulsory for every mutual fund advisor
interested in selling mutual fund. Taxes: During a typical year, most actively managed mutual funds sell
anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made. Cost of Churn: The portfolio of fund does not remain constant. The
extent to which the portfolio changes is a function of the style of the individual fund manager i.e. whether he is a buy and hold type of manager or one who aggressively churns the fund. It is also dependent on the volatility of the fund size i.e. whether the fund constantly 43
receives fresh subscriptions and redemptions. Such portfolio changes have associated costs of brokerage, custody fees etc. which lowers the portfolio return commensurately.
Major Mutual Fund Companies in India
ABN AMRO Mutual Fund ABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO Trustee (India) Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO Asset Management (India) Ltd. was incorporated on November 4, 2003. Deutsche Bank A G is the custodian of ABN AMRO Mutual Fund. As of may 2008, the fund has assets of Rs.6066.30
crores under
management. Birla Sun Life Mutual Fund Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life Financial. Sun Life Financial is a global organisation evolved in 1871 and is being represented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart from India. Birla Sun Life Mutual Fund follows a conservative long-term approach to investment. As of may 2008, the fund has assets of Rs. 41,426.64 crores under management.
44
Bank of Baroda Mutual Fund Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30, 1992 under the sponsorship of Bank of Baroda. BOB Asset Management Company Limited is the AMC of BOB Mutual Fund and was incorporated on November 5, 1992. Deutsche Bank AG is the custodian of Bank of Baroda Mutual Fund. As of May 2008, the fund has assets of Rs. 64.83 crores under management. HDFC Mutual Fund AMC is a joint venture between housing finance giant HDFC and British investment firm Standard Life Investments Limited was setup on June 30, 2000. It conducts the operations of the Mutual Fund and manages assets of the schemes, including the schemes launched from time to time. As of Feb 2008, the fund has assets of Rs.46,291.97 crores under management. In 2003, following a decision by the Zurich Insurance Company (ZIC), the Sponsor of Zurich India Mutual Fund, to divest its asset management business in India, AMC had entered into an agreement with ZIC to acquire the asset management business. Consequently, all the schemes of Zurich Mutual Fund in India had been transferred to HDFC Mutual Fund and renamed as HDFC schemes.
45
HSBC Mutual Fund HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital Markets (India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual Fund acts as the Trustee Company of HSBC Mutual Fund. As of may 2008, the fund has assets of Rs. 17,617.11 crores under management. ING Vysya Mutual Fund ING Vysya Mutual Fund was setup on February 11, 1999 with the same named Trustee Company. It is a joint venture of Vysya and ING. The AMC, ING Investment Management (India) Pvt. Ltd. was incorporated on April 6, 1998. As of May 2008, the fund has assets of Rs. 8,608.29 crores under management. Prudential ICICI Mutual Fund The mutual fund of ICICI is a joint venture with Prudential Plc. of America; one of the largest life insurance companies in the USA. Prudential ICICI Mutual Fund was setup on 13th of October 1993 with two sponsors, Prudential Plc. and ICICI Ltd. The Trustee Company formed is Prudential ICICI Trust Ltd. and the AMC is Prudential ICICI Asset Management Company Limited incorporated on 22nd of June,
46
1993. As of May 2008, the fund has assets of Rs.59,573.08
crores
under management. Sahara Mutual Fund Sahara Mutual Fund was set up on July 18, 1996 with Sahara India Financial Corporation Ltd. as the sponsor. Sahara Asset Management Company Private Limited incorporated on August 31, 1995 works as the AMC of Sahara Mutual Fund. As of May 2008, the fund has assets of Rs. 180.64 crores under management. State Bank of India Mutual Fund State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch offshore fund, the India Magnum Fund with a corpus of Rs. 225 cr. approximately. Today it is the largest Bank sponsored Mutual Fund in India. They have already launched 52 Schemes out of which 15 have already yielded handsome returns to investors. State Bank of India Mutual Fund has more than Rs. 29,492.97 Crores as AUM. Now it has an investor base of over 38 Lakhs spread over 52 schemes. Tata Mutual Fund Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsors for Tata Mutual Fund are Tata Sons Ltd., and Tata Investment Corporation Ltd. The investment manager is Tata Asset Management Limited and its Tata Trustee Company Pvt. Limited. Tata Asset 47
Management Limited's is one of the fastest in the country with more than Rs. 24,478.45 crores as on may, 2008 of AUM. Kotak Mahindra Mutual Fund Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. KMAMC started its operations in December 1998. Kotak Mahindra Mutual Fund offers schemes catering to investors with varying risk return profiles. It was the first company to launch dedicated gilt scheme investing only in government securities. As of May 2008, the fund has assets of Rs.21,580.62 crores under management. Unit Trust of India Mutual Fund UTI Asset Management Company Private Limited, established in Jan 14, 2003, manages the UTI Mutual Fund with the support of UTI Trustee Company Private Limited. UTI Asset Management Company presently manages a corpus of over Rs. 48,347.60 Crore. The sponsors of UTI Mutual Fund are Bank of Baroda (BOB), Punjab National Bank (PNB), State Bank of India (SBI), and Life Insurance Corporation of India (LIC). The schemes of UTI Mutual Fund are Liquid Funds, Income Funds, Asset Management Funds, Index Funds, Equity Funds and Balance Funds. Reliance Mutual Fund Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882. The sponsor of RMF is Reliance Capital Limited and 48
Reliance Capital Trustee Co. Limited is the Trustee. It was registered on June 30, 1995 as Reliance Capital Mutual Fund, which was changed on March 11, 2004. Reliance Mutual Fund was formed for launching of various schemes under which units are issued to the Public with a view to contribute to the capital market and to provide investors the opportunities to make investments in diversified securities. As of May 2008, the fund has assets of Rs.93,531.68 crores under management. IDFC MUTUAL FUND Standard Chartered Mutual Fund was set up on March 13, 2000 sponsored by Standard Chartered Bank. The Trustee is Standard Chartered Trustee Company Pvt. Ltd. Standard Chartered Asset Management Company Pvt. Ltd. is the AMC which was incorporated with SEBI on December 20,1999. As of May 2008, the fund has assets of Rs.12,513.40 crores under management. Franklin Templeton India Mutual Fund The group, Frnaklin Templeton Investments is a California (USA) based company. It is one of the largest financial services groups in the world. Investors can buy or sell the Mutual Fund through their financial advisor or through mail or through their website. They have Open end Diversified Equity schemes, Open end Sector Equity schemes, Open end Hybrid schemes, Open end Tax Saving schemes, Open end Income and Liquid schemes, Closed end Income schemes and Open end Fund of 49
Funds schemes to offer. As of May 2008, the fund has assets of Rs. 25,621.97 crores under management. Morgan Stanley Mutual Fund India Morgan Stanley is a worldwide financial services company and its leading in the market in securities, investment management and credit services.
Morgan
Stanley
Investment
Management
(MISM)
was
established in the year 1975. It provides customized asset management services and products to governments, corporations, pension funds and non-profit organisations. Its services are also extended to high net worth individuals and retail investors. In India it is known as Morgan Stanley Investment Management Private Limited (MSIM India) and its AMC is Morgan Stanley Mutual Fund (MSMF). This is the first close end diversified equity scheme serving the needs of Indian retail investors focusing on a long-term capital appreciation. As of May 2008, the fund has assets of Rs. 3,416.93crores under management.
Escorts Mutual Fund Escorts Mutual Fund was setup on April 15, 1996 with Escorts Finance Limited as its sponsor. The Trustee Company is Escorts Investment Trust Limited. Its AMC was incorporated on December 1, 1995 with the name Escorts Asset Management Limited. As of May 2008, the fund has assets of Rs. 173.42 crores under management. 50
Alliance Capital Mutual Fund Alliance Capital Mutual Fund was setup on December 30, 1994 with Alliance Capital Management Corp. of Delaware (USA) as sponsorer. The Trustee is ACAM Trust Company Pvt. Ltd. and AMC, the Alliance Capital Asset Management India (Pvt) Ltd. with the corporate office in Mumbai. Benchmark Mutual Fund Benchmark Mutual Fund was setup on June 12, 2001 with Niche Financial Services Pvt. Ltd. as the sponsor and Benchmark Trustee Company Pvt. Ltd. as the Trustee Company. Incorporated on October 16, 2000 and headquartered in Mumbai, Benchmark Asset Management Company Pvt. Ltd. is the AMC. As of May 2008, the fund has assets of Rs. 4954.42 crores under management. Canbank Mutual Fund Canbank Mutual Fund was setup on December 19, 1987 with Canara Bank acting as the sponsor. Canbank Investment Management Services Ltd. incorporated on March 2, 1993 is the AMC. The Corporate Office of the AMC is in Mumbai. As of May 2008, the fund has assets of Rs. 4122.37 crores under management. LIC Mutual Fund Life Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. It contributed Rs. 2 Crores towards the corpus of the Fund. LIC 51
Mutual Fund was constituted as a Trust in accordance with the provisions of the Indian Trust Act, 1882.The Company started its business on 29th April 1994. The Trustees of LIC Mutual Fund have appointed Jeevan Bima Sahayog Asset Management Company Ltd as the Investment Managers for LIC Mutual Fund. As of May 2008, the fund has assets of Rs. 15,103 crores under management
52
.
Assets under Management:
53
TYPES OF MUTUAL FUNDS General Classification of Mutual Funds Open end funds/ closed end funds Open-end
Funds that can sell and purchase units at any point in time are classified as Open-end Funds. The fund size (corpus) of an open-end fund is variable (keeps changing) because of continuous selling (to investors) and repurchases (from the investors) by the fund. An open-end fund is not required to keep selling new units to the investors at all times but is required to always repurchase, when an investor wants to sell his units. The NAV of an open-end fund is calculated every day. Closed-end Funds
Funds that can sell a fixed number of units only during the New Fund Offer (NFO) period are known as Closed-end Funds. The corpus of a Closed-end Fund remains unchanged at all times. After the closure of the offer, buying and redemption of units by the investors directly from the Funds is not allowed. However, to protect the interests of the investors, SEBI provides investors with two avenues to liquidate their positions: Closed-end Funds are listed on the stock exchanges where investors can buy/sell units from/to each other. The trading is generally done at a 54
discount to the NAV of the scheme. The NAV of a closed-end fund is computed on a weekly basis (updated every Thursday). Closed-end Funds may also offer "buy-back of units" to the unit holders. In this case, the corpus of the Fund and its outstanding units do get changed. Load Funds/ No load Funds Load funds-Mutual Funds incur various expenses on marketing,
distribution, advertising, portfolio churning, fund manager's salary etc. Many funds recover these expenses from the investors in the form of load. These funds are known as Load Funds. A load fund may impose following types of loads on the investors: Entry Load - Also known as Front-end load, it refers to the load
charged to an investor at the time of his entry into a scheme. Entry load is deducted from the investor's contribution amount to the fund. Exit Load - Also known as Back-end load, these charges are imposed
on an investor when he redeems his units (exits from the scheme). Exit load is deducted from the redemption proceeds to an outgoing investor. Deferred Load - Deferred load is charged to the scheme over a period
of time.
55
Contingent Deferred Sales Charge (CDSC) - In some schemes, the
percentage of exit load reduces as the investor stays longer with the fund. This type of load is known as Contingent Deferred Sales Charge. No-load
Funds
All those funds that do not charge any of the above mentioned loads are known as No-load Funds.
Tax Exempt/ Non Tax Exempt Funds Tax-exempt Funds- Funds that invest in securities free from tax are
known as Tax-exempt Funds. All open-end equity oriented funds are exempt from distribution tax (tax for distributing income to investors). Long term capital gains and dividend income in the hands of investors are tax-free. Non-Tax-exempt Funds- Funds that invest in taxable securities are
known as Non-Tax-exempt Funds. In India, all funds, except open-end equity oriented funds are liable to pay tax on distribution income. Profits arising out of sale of units by an investor within 12 months of purchase are categorized as short-term capital gains, which are taxable. Sale of
56
units of an equity oriented fund is subject to Securities Transaction Tax (STT). STT is deducted from the redemption proceeds to an investor.
BROAD MUTUAL FUND TYPES
57
58
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:
Aggressive Growth Funds - In Aggressive Growth Funds, fund
managers aspire for maximum capital appreciation and invest in less researched shares of speculative nature. Because of these speculative investments Aggressive Growth Funds become more volatile and thus, are prone to higher risk than other 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.
Speciality Funds - Speciality Funds have stated criteria for
investments and their portfolio comprises of only those companies that meet their criteria. Criteria for some speciality funds could be to invest/not to invest in particular regions/companies. Speciality funds are concentrated and thus, are comparatively riskier than 59
diversified funds.. There are following types of speciality funds:
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.
Foreign Securities Funds: Foreign Securities Equity Funds have
the option to invest in one or more foreign companies. Foreign securities funds achieve international diversification and hence they are less risky than sector funds. However, foreign securities funds are exposed to foreign exchange rate risk and country risk.
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 60
risky.
Option Income Funds: While not yet available in India, Option
Income Funds write options on a large fraction of their portfolio. Proper use of options can help to reduce volatility, which is otherwise considered as a risky instrument. These funds invest in big, high dividend yielding companies, and then sell options against their stock positions, which generate stable income for investors.
Diversified Equity Funds - Except for a small portion of
investment in liquid money market, diversified equity funds invest mainly in equities without any concentration on a particular sector(s). These funds are well diversified and reduce sectorspecific 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.
61
Equity Index Funds - Equity Index Funds have the objective to
match the performance of a specific stock market index. The portfolio of these funds comprises of the same companies that form the index and is constituted in the same proportion as the index. Equity index funds that follow broad indices (like S&P CNX Nifty, Sensex) are less risky than equity index funds that follow narrow sectoral indices (like BSEBANKEX or CNX Bank Index etc). Narrow indices are less diversified and therefore, are more risky.
Value Funds - Value Funds invest in those companies that have
sound fundamentals and whose share prices are currently undervalued. The portfolio of these funds comprises of shares that are trading at a low Price to Earning Ratio (Market Price per Share / Earning per Share) and a low Market to Book Value (Fundamental Value) Ratio. Value Funds may select companies from diversified sectors and are exposed to lower risk level as compared to growth funds or speciality funds. Value stocks are generally from cyclical industries (such as cement, steel, sugar etc.) which make them volatile in the short-term. Therefore, it is advisable to invest in Value funds with a long-term time horizon as risk in the long term, to a large extent, is reduced.
Equity Income or 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 (such as Power 62
or
Utility
companies
whose
share
prices
fluctuate
comparatively lesser than other companies' share prices). Equity Income or Dividend Yield Equity Funds are generally exposed to the lowest risk level as compared to other equity funds. 2. Debt / Income 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 63
default by a debt issuer, is shared by all investors which further reduces risk for an individual investor.
Focused Debt Funds* - Unlike diversified debt funds, focused
debt funds are narrow focus funds that are confined to investments in selective debt securities, issued by companies of a specific sector or industry or origin. Some examples of focused debt funds are sector, specialized and offshore debt funds, funds that invest only in Tax Free Infrastructure or Municipal Bonds. Because of their narrow orientation, focused debt funds are more risky as compared to diversified debt funds. Although not yet available in India, these funds are conceivable and may be offered to investors very soon.
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.
64
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. However, the security of investments depends upon the net worth of the guarantor (whose name is specified in advance on the offer document). 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 65
investors. The objective of fixed term plan schemes is to gratify investors by generating some expected returns in a short period. 3. Gilt Funds - Also known as Government Securities in India, Gilt
Funds invest in government papers (named dated securities) having medium to long term maturity period. Issued by the Government of India, these investments have little credit risk (risk of default) and provide safety of principal to the investors. However, like all debt funds, gilt funds too are exposed to interest rate risk. Interest rates and prices of debt securities are inversely related and any change in the interest rates results in a change in the NAV of debt/gilt funds in an opposite direction.
4. Money Market / Liquid Funds - Money market / liquid funds invest
in short-term (maturing within one year) interest bearing debt instruments. These securities are highly liquid and provide safety of investment, thus making money market / liquid funds the safest investment option when compared with other mutual fund types. However, even money market / liquid funds are exposed to the interest rate risk. The typical investment options for liquid funds include Treasury Bills (issued by governments), Commercial papers (issued by companies) and Certificates of Deposit (issued by banks).
66
5. Hybrid Funds - As the name suggests, hybrid funds are those funds
whose portfolio includes a blend of equities, debts and money market securities. Hybrid funds have an equal proportion of debt and equity in their portfolio. There are following types of hybrid funds in India:
Balanced Funds - The portfolio of balanced funds include assets
like debt securities, convertible securities, and equity and preference shares held in a relatively equal proportion. The objectives of balanced funds are to reward investors with a regular income, moderate capital appreciation and at the same time minimizing the risk of capital erosion. Balanced funds are appropriate for conservative investors having a long term investment horizon.
Growth-and-Income Funds - Funds that combine features of
growth funds and income funds are known as Growth-and-Income Funds. These funds invest in companies having potential for capital appreciation and those known for issuing high dividends. The level of risks involved in these funds is lower than growth funds and higher than income funds.
Asset Allocation Funds - Mutual funds may invest in financial
assets like equity, debt, money market or non-financial (physical) assets like real estate, commodities etc.. Asset allocation funds adopt a variable asset allocation strategy that allows fund managers to switch over from one asset class to another at any time depending upon their outlook for specific markets. In other 67
words, fund managers may switch over to equity if they expect equity market to provide good returns and switch over to debt if they expect debt market to provide better returns. It should be noted that switching over from one asset class to another is a decision taken by the fund manager on the basis of his own judgment and understanding of specific markets, and therefore, the success of these funds depends upon the skill of a fund manager in anticipating market trends.
6. Commodity Funds-Those funds that focus on investing in different commodities (like metals, food grains, crude oil etc.) or commodity companies or commodity futures contracts are termed as Commodity Funds. A commodity fund that invests in a single commodity or a group of commodities is a specialized commodity fund and a commodity fund that invests in all available commodities is a diversified commodity fund and bears less risk than a specialized commodity fund. "Precious Metals Fund" and Gold Funds (that invest in gold, gold futures or shares of gold mines) are common examples of commodity funds.
7. Real Estate Funds- Funds that invest directly in real estate or lend
to real estate developers or invest in shares/securitized assets of housing finance companies, are known as Specialized Real Estate 68
Funds. The objective of these funds may be to generate regular income for
investors
or
capital
appreciation.
8. Exchange Traded Funds (ETF) - Exchange Traded Funds provide
investors with combined benefits of a closed-end and an open-end mutual fund. Exchange Traded Funds follow stock market indices and are traded on stock exchanges like a single stock at index linked prices. The biggest advantage offered by these funds is that they offer diversification, flexibility of holding a single share at the same time. Recently introduced in India, these funds are quite popular abroad.
9. Fund of Funds- Mutual funds that do not invest in financial or
physical assets, but do invest in other mutual fund schemes offered by different AMCs, are known as Fund of Funds. Fund of Funds maintain a portfolio comprising of units of other mutual fund schemes, just like conventional
mutual
funds
maintain
a
portfolio
comprising
of
equity/debt/money market instruments or non financial assets. Fund of Funds provide investors with an added advantage of diversifying into different mutual fund schemes with even a small amount of investment, which further helps in diversification of risks. However, the expenses of Fund of Funds are quite high on account of compounding expenses of investments
69
into
different
mutual
fund
schemes.
Risk Heirarchy of Different Mutual Funds - Thus, different mutual
fund schemes are exposed to different levels of risk and investors should know the level of risks associated with these schemes before investing. The graphical representation hereunder provides a clearer picture of the relationship between mutual funds and levels of risk associated with these funds:
70
Research Methodology
In this report two methods of research have been followed: Primary research Secondary research
71
Primary research: A sample of 100 people from Religare’s clientele base, who had already invested in mutual funds and those who were interested for investment in mutual funds, was taken from Delhi & NCR region and they were asked to fill the questionnaire containing 10 questions which indicated the factors affecting the investors’ decisions while investing in mutual funds. Due to response error, responses of 20 respondents could not be taken into account. So the final sample size is 80. The data collection method used was personal interview. b) Secondary research: A samples of top 15 mutual funds from each category of funds was taken and their 3 month, 6 month, 1 year returns were taken for the analysis of return as a factor and similarly Beta ratio and Sharpe ratio’s were taken for the analysis of other factors.
Now, 10 factors indicated in the questionnaire according to which investors invest in mutual funds are: Age Source of income Plans to retire Returns expected Number of dependents Level of knowledge Level of acceptable risk Time of investment Willingness to stay during volatile times Dependence on funds So I applied Factor Analysis on the data collected, so as to find out which of these factors are most critical and which are less critical.
72
Then as a result of factor analysis, the factor which came out to be mostly critical is risk taking ability (as indicated from Age, Level of knowledge, Level of acceptable risk & Willingness to stay during volatile times) and second most critical factor is return over a given period of time (as indicated from plans to retire, returns expected & time of investment) and third is future requirement of funds (as indicated from source of income and no. of dependents).
Research Hypothesis
‘
73
Since risk taking ability (as indicated from Age, Level of knowledge, Level of acceptable risk & Willingness to stay during volatile times) came out be the most critical factor and in case of mutual funds it is indicated by Beta Factor, So for comparing risk in Equity and Debt funds we assume the null hypothesis: H1: Beta Factor of Equity funds is same as that Debt funds
Now, second most critical Factor came out to be the returns over a given period of time (as indicated from plans to retire, returns expected & time of investment). So we will compare on the basis of their 3 month, 6 month, 1 year returns. Therefore, we assume the following three hypotheses: H2 (a): 3 month return of Equity funds is same as that Debt funds
H2 (b): 6 month return of Equity funds is same as that Debt funds H2 (c): 1 year return of Equity funds is same as that Debt funds Finally, third most critical Factor came out to be the future requirement of funds (as indicated from source of income and no. of dependents). For that matter Sharp Ratio of Equity and Debt funds can be compared because it indicates the average returns given by the fund over the risk-free rate per unit of market risk (standard deviation). Therefore, we assume the hypothesis: H3: Sharp Ratio of Equity funds is same as that Debt funds
Observations
74
Beta factor of Equity and Debt funds are as shown below:
Top 10 equity funds as on 23/06/2008 are: Ran
Scheme Name
Beta
k Reliance Diversified Power Sector Fund 1 2 3 4 5 6
Growth Taurus Libra Taxshield - Growth DWS Investment Opportunity Fund – G Reliance Regular Savings Fund – Growth IDFC premier equity fund-Growth ICICI Pru Infrastructure fund-Growth Sundram BNP Paribasselect focus fund-
0.44 0.33 0.35 0.36 0.41 0.36
7 8 9 10
G BOB Grpwth Fund- Growth SBI magnum comma fund Growth DWS Alpha Equity Fund- Growth
0.28 0.29 0.34 0.28
Top 10 debt funds as on 23/06/2008 are: 75
Ran k 1 2 3 4 5 6 7 8 9 10
Scheme Name
Beta
DBS Chola Monthly Income Plan - Growth PRINCIPAL Monthly Income Plan Plus – G Birla Sun Life Income Plus - Growth Birla Sun Life Income Fund - 54EA - G Birla Sun Life Income Fund - 54EB - G Birla Sun Life Income Fund - Growth ING Income Fund - Regular Plan - Growth Birla Sun Life Dynamic Bond Fund - Retail
0.79 0.93 1.38 1.05 1.05 1.05 0.31
- Growth PRINCIPAL Monthly Income Plan - G IDFC Dynamic Bond Fund - Plan A - G
0.27 0.64 1
3 month returns of Equity and Debt funds are as shown below: Top 15 equity funds as on 23/06/2008 are: Rank
Scheme Name
Last 3 Month s% 19.44 and 16.19
1 2
Franklin Infotech Fund - Growth UTI Growth Sector Fund -
3 4 5 6 7 8 9 10 11 12 13
Healthcare - Growth JM Healthcare Sector Fund - Growth SBI Magnum Sector Umbrella - Pharma Fund-G UTI Growth Sector Fund - Software - Growth Reliance Pharma Fund - Growth Franklin Pharma Fund - Growth Tata Life Sciences and Technology Fund PRINCIPAL Global Opportunities Fund – G SBI Magnum Sector Umbrella - Infotech Fund Taurus Libra Taxshield - Growth Birla Sun Life International Equity Fund-G ICICI Prudential Technology Fund - Growth
76
Pharma
15.27 13.62 13.36 13.29 13.01 11.75 11.42 10.2 9.46 8.13 7.29
14 15
Franklin Asian Equity Fund - Growth JM Emerging Leaders Fund - Growth
5.31 5.26
Top 15 debt funds as on 23/06/2008 are: Ran Scheme Name
Last 3
k
Month
1
s% Tata Fixed Income Portfolio Fund - Series B3 - 9.75
2 3 4
Retail - G 7.56 UTI Fixed Term Income Fund - Series II-Plan 16G 3.76 Franklin India International Fund UTI Fixed Maturity Plan - Mar 08 - Harlf Yearly 2.81
5 6
Series - Retail – G 2.75 Reliance Fixed Horizon Fund 7 Series 4 Retail-G Sundaram BNP Paribas Interval Fund - QS - Plan B 2.73
7 8 9
- Ret - G 2.72 ING Long Term Fixed Maturity Plan - I - Retail - G 2.71 Canara Robeco Income Scheme - Growth DWS Money Plus Advantage Fund - Regular - 2.71
10
Growth Lotus India Quarterly Interval Fund - Plan F - 2.69
11
Growth UTI Fixed Income Interval Fund - Quarterly Plan I – 2.68
12 13
Regular-G 2.68 Tata Floating Rate Fund - Long Term - Growth Tata Fixed Investment Plan 1 - Series A - Regular - 2.66
14
Growth Lotus India Quarterly Interval Fund - Plan D - 2.65
15
Growth Reliance Fixed Horizon Fund 7 - Series 3 - Retail - 2.65
77
Growth
6 month returns of Equity and Debt funds are as shown below: Top 15 equity funds as on 23/06/2008 are: Rank
Scheme Name
Last 6 Month
1 2 3 4 5 6
s% 4.83 UTI Spread Fund - Growth 4.51 HDFC Arbitrage Fund - Institutional - Growth 4.38 HDFC Arbitrage Fund - Retail - Growth 4.37 Lotus India Arbitrage Fund - Growth 4.3 JM Arbitrage Advantage Fund - Growth ICICI Prudential Blended Plan - Option A - 4.15
7 8
Growth 4.05 Kotak Equity Arbitrage Fund - Growth Benchmark Equity And Derivative 4.05
9
Opportunities Fund-G IDFC Arbitrage Fund - Plan B (Institutional) - 4.03
10 11
Growth 3.98 SBI Arbitrage Opportunities Fund - Growth IDFC Arbitrage Fund - Plan A (Regular) - 3.77
12
Growth IDFC Fixed Maturity Arbitrage Fund - S1 - Plan 3.66
13
A-G IDFC Fixed Maturity Arbitrage Fund - S1 - Plan 3.66
14
B-G PRINCIPAL Global Opportunities Fund - Growth
78
2.31
15
Birla Sun Life International Equity Fund - Plan -1.16 A - Growth
Top 15 debt funds as on 23/06/2008 are: Ran Scheme Name
Last 6
k
Month
1 2
s% 11.87 DBS Chola Monthly Income Plan - Growth UTI Fixed Term Income Fund - Series II - Plan 16 8.22
3 4
(Feb 07) -G 7.83 Franklin India International Fund ABN AMRO Interval Fund - Monthly Plan A - 6.39
5
Growth-Red Birla Sun Life Dynamic Bond Fund - Retail - 5.88
6 7 8
Growth 5.66 Kotak Wealth Builder Series I - Growth 5.63 ING Income Fund - Regular Plan - Growth ICICI Prudential Interval Fund II - Quarterly 5.45
9
Interval Plan E-G HDFC Fixed Maturity Plan - 367D - Sep 2007 (6) 5.24
10 11
Retail – G 5.18 LIC MF Fixed Maturity Plan - Series 22 - Growth Sundaram BNP Paribas Interval Fund - QS - Plan 5.16
12
B - Ret - G HDFC Fixed Maturity Plan - 367D (2) - Sep 2007 5.06
13
(6) Retail – G LIC MF Fixed Maturity Plan - Series 32 ( 13 5.05
14
Months) – G Lotus India Quarterly Interval Fund - Plan D - 5.05
79
15
Growth UTI Fixed Income Interval Fund - Quarterly Plan I 5.02 - Regular - G
1year returns of Equity and Debt funds are as shown below: Top 15 equity funds as on 23/06/2008 are: Ran Scheme Name
Last
k
12 Month
1
s% Reliance Diversified Power Sector Fund - 30.52
2 3
Growth 22.26 Taurus Libra Taxshield - Growth DWS Investment Opportunity Fund - 20.18
4
Growth Reliance Regular Savings Fund - Equity - 15.01
5
Growth ICICI Prudential Infrastructure Fund - FII 14.41
6 7
Growth 13.78 IDFC Premier Equity Fund - Growth ICICI Prudential Infrastructure Fund - 13.41
8
Growth Sundaram BNP Paribas Select Focus - 13.14
9 10 11 12 13
Growth BOB Growth Fund - Growth SBI Magnum COMMA Fund - Growth DWS Alpha Equity Fund - Growth HSBC Equity Fund - Growth PRINCIPAL Global Opportunities Fund Growth
80
12.61 12.57 11.32 10.51 10.48
14
Templeton India Equity Income Fund - 9.54
15
Growth UTI Spread Fund - Growth
9.09
Top 15 debt funds as on 23/06/2008 are: Ran Scheme Name
Last
k
12 Month
1 2 3 4 5 6 7 8 9 10
s% 24.38 DBS Chola Monthly Income Plan - Growth 12.63 PRINCIPAL Monthly Income Plan Plus - Growth 12.28 Birla Sun Life Income Plus - Growth 11.8 Birla Sun Life Income Fund - 54EA - Growth 11.8 Birla Sun Life Income Fund - 54EB - Growth 11.8 Birla Sun Life Income Fund - Growth 11.3 ING Income Fund - Regular Plan - Growth 11.06 Birla Sun Life Dynamic Bond Fund - Retail - Growth 10.99 PRINCIPAL Monthly Income Plan - Growth Sundaram BNP Paribas FTP - Series XIII - (30 10.89
11 12
Months) - Growth 10.79 LIC MF Fixed Maturity Plan - Series 22 - Growth Sundaram BNP Paribas FTP - Series XII - (18 Months) 10.71
13 14
- Growth 10.63 IDFC Dynamic Bond Fund - Plan A - Growth HDFC Fixed Maturity Plan - 24M - May 2007 (5) 10.47
15
Retail - Growth JM Fixed Maturity Fund - Series IV - 15 Months Plan 2 10.28 - Growth
81
Sharpe ratio of Equity and Debt funds is as shown below: Top 15 equity funds as on 23/06/2008 are: Sharp Rank
Scheme Name ratio Reliance Diversified Power Sector Fund - 0.85
1
Growth
2
Taurus Libra Taxshield - Growth
0.96
3
DWS Investment Opportunity Fund - Growth
0.96
4
Reliance Regular Savings Fund - Growth
0.83
5
IDFC premeir equity fund-Growth
0.76
6
0.93 ICICI Pru Infrastructure fund-Growth Sundram BNP Paribasselect focus fund- 1.13
7
Growth
8
BOB Grpwth Fund- Growth
0.91
9
SBI magnum comma fund Growth
0.92
10
DWS Alpha Equity Fund- Growth
0.96
Top 15 debt funds as on 23/06/2008 are: Sharp Rank
Scheme Name
1 2
DBS Chola Monthly Income Plan - Growth 0.23 PRINCIPAL Monthly Income Plan Plus - 0.47
82
ratio
Growth 3
Birla Sun Life Income Plus - Growth 0.3 Birla Sun Life Income Fund - 54EA -
4
Growth 0.39 Birla Sun Life Income Fund - 54EB -
5
Growth
0.39
6
Birla Sun Life Income Fund - Growth
0.39
7
ING Income Fund - Regular Plan - Growth 0.21 Birla Sun Life Dynamic Bond Fund - Retail
8
- Growth
9
PRINCIPAL Monthly Income Plan - Growth 0.49 IDFC Dynamic Bond Fund - Plan A -
10
Growth
RESULTS
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0.44
0.27
Testing of H1: Ho: Beta (Equity funds) = Beta (Debt funds) H1: Beta (Equity funds) > Beta (Debt funds)
t-Test: Two-Sample Assuming Unequal Variances
Mean Variance Observations Hypothesized Mean Difference df t Stat P(T<=t) one-tail t Critical one-tail
Here, calculated t18(0.05) = -4.48732 and, tabulated t18(0.05) = 1.83311 Now since, t calculated < t tabulated
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Variable 1 0.344 0.00283 10 0 9 -4.48732 0.00076 1.83311
Variable 2 0.847 0.122823 10
Therefore, null hypothesis is accepted i.e. beta of Equity funds is not greater than Debt funds, which means Equity funds are more volatile than Debt funds. Therefore, Equity funds are more risky as compared to Debt funds.
Testing of H2 (a): Ho: 3 month Average Returns (Equity funds) = 3 month Average Returns (Debt funds) H1: 3 month Average Returns (Equity funds) > 3 month Average Returns (Debt funds) Proof: Now applying t-test,
t-Test: Two-Sample Assuming Unequal Variances Variable 1 11.5333333
Variable 2 3.56733333
Mean
3 16.0663809
3 4.51323523
Variance Observations Hypothesized Mean Difference df
5 15 0 21 6.80091420
8 15
t Stat P(T<=t) one-tail
5 5.01266E-07 1.72074287
t Critical one-tail
1
Here, calculated t = 6.8009 and tabulated t= 1.7207 Now since, calculated t28(0.05) > tabulated t28(0.05)
85
Therefore, null hypothesis is not accepted i.e. 3 month average Returns of Equity funds are greater than Debt funds.
Testing of H2 (b): Ho: 6 month Average Returns (Debt funds) = 6 month Average Returns (Equity funds) H1: 6 month Average Returns (Debt funds) > 6 month Average Returns (Equity funds) Proof: Now applying t-test,
t-Test: Two-Sample Assuming Unequal Variances Variable 1 6.17933333
Variable 2 3.65933333
Mean
3 3.46984952
3 2.09814952
Variance
4
4
Observations
15
15
Hypothesized Mean Difference
0
Df
26 4.13615298
t Stat
9 0.00016376
P(T<=t) one-tail
1 1.70561790
t Critical one-tail
1
Here, calculated t = 4.1361 and tabulated t = 1.70561 Now since, calculated t28(0.05)> tabulated t28(0.05) Therefore, null hypothesis is not accepted i.e. 6 month average Returns of Debt funds are greater than Equity funds.
86
Testing of H2 (c): Ho: 1 year Average Returns (Equity funds) = 1 year Average Returns (Debt funds) H1: 1 year Average Returns (Equity funds) > 1 year Average Returns (Debt funds) Proof: Now applying t-test,
T-Test: Two-Sample Assuming Unequal Variances Variable 1 14.588666
Variable 2
Mean
67 32.584740
12.12066667
Variance Observations Hypothesized
95 15
11.96939238 15
Mean
Difference df
0 23 1.4320124
t Stat
2 0.0827955
P(T<=t) one-tail
47 1.7138715
t Critical one-tail
17
Here, calculated t = 1.43201 and tabulated t = 1.71387 Now since, t28(0.05) calculated < t28(0.05) tabulated
87
Therefore, null hypothesis is accepted i.e. 1 year average Returns of Equity funds are equal to Debt funds.
Testing of H3: Ho: Sharpe Ratio (Equity funds) = Sharpe Ratio (Debt funds) H1: Sharpe Ratio (Equity funds) > Sharpe Ratio (Debt funds) Proof: Now applying t-test,
t-Test: Two-Sample Assuming Unequal Variances
Mean Variance Observations Hypothesized
Variable 1 0.921 0.009743
Variable 2 0.358 0.00990666
333 10
7 10
Mean
Difference Df
0 18 12.70068
t Stat
42 1.00668E-
P(T<=t) one-tail
10 1.734063
t Critical one-tail
592
Here, calculated t = 12.70068 and tabulated t = 1.734063 Now since, calculated t18(0.05) > tabulated t18(0.05) Therefore, null hypothesis is rejected i.e. on an average Sharpe Ratio of Equity funds is greater than Debt funds.
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ANALYSIS
Analysis of Hypothesis H1
From the Results of hypothesis H(1) it was found that Risk is more in Equity funds as compared to Debt funds. Risk is one of the important factor during investments. Each investor has great importance for it.
89
Risk is also considered as more in equity funds as compared to debt funds due to many reasons. One of the major reason is that most of these funds invest a big portion of investments in equity and equity market is always more volatile as compared to risk in debt funds. But in equity Sector funds, Thematic funds and aggervisely managed funds are considered as more risky as compared to Balanced funds and Tax Planning funds because these funds concentrate more on return for a particular level of risk. Risk in Equity funds Sector funds or sector-specific funds have a mandate to invest in just one
sector.
In
the
past,
particularly
during
the
TMT
(technology/media/telecom) boom in 1999-early 2000, there was a flood of sector funds targeting the technology/software sector. Apart from this, there were already some sector funds in place with the mandate to invest in the FMCG (fast moving consumer goods) and pharma sectors. avoid sector funds, unless you have a view on the sector and know exactly when to invest in it and exit from it. Sector funds are high risk investment avenues and over the long term (3-5 years) they rarely outperform well-managed diversified equity funds.
Thematic funds invest in a theme rather than in a single sector. So while the fund manager’s investment options remained restricted to the theme, he still has several sectors to choose from within that theme. A theme like infrastructure for instance, has several related sectors like cement, steel, capital goods/engineering as also unrelated sectors like banking and finance. When it comes to stock-picking, this gives the fund manager more flexibility when he is managing a thematic fund as compared to a sector fund. We can’t think of a single theme that is so enduring that it will make the fund manager forget every other theme till the time that fund is in existence
90
A well-managed diversified equity which usually never invests more than 5% in a single stock, compared to other which has even 31.9% in its leading stock . So these types of funds which invest aggressively for higher returns are more risky as compared to the equity diversified funds The benchmark for evaluating the diversification of an equity fund’s stock portfolio is to assess the concentration of assets in the top 10 stocks. If the top 10 stocks account for less than 40% of net assets (which is also a global benchmark), the fund is well-diversified in our view. Risk in Debt funds Such misconceptions that debt funds carry low risk catch out the investors. Consider a situation when the oil price is galloping past $30 a barrel. The demand for dollars to pay for oil imports pulls down the rupee value. The RBI, in all likelihood, will step in to defend the rupee, and that means hiking short-term interest rates. Now, a hike in rates means lower bond prices because of the inverse price-yield relationship (bond prices fall when rates rise and prices rise when rates fall). A consequent drop in the NAV will hit the unwary unit-holder where he sits.
Debt funds primarily face two types of risk. First of a fall in market price due to demand-supply factor. And, second, of a fall in market price due to rise in interest rates. Market risk Consider the market risk. Bond prices, like all instruments, are predicated on the principle of demand and supply. This means that bond prices will fall when supply is relatively more than demand. This typically happens when the rupee is falling sharply against the dollar, or when the call rates are very high. At such times, banks, the biggest investors in the bond market, sell to generate rupee resources. The excess supply of bonds in the market pulls down bond prices and, consequently, the NAVs of debt funds. Interest-rate risk 91
Debt funds also carry interest rate risk. This is the risk that bond prices will fall because of a change in the interest rates. Interest rates have an inverse relationship on the price of debt securities. If the rates rise, their prices fall to adjust for the current yield, and vice versa. If a fund holds a large portfolio with securities of longer maturities, the impact on NAV is usually negative when rat As interest rates harden, short-term debt funds have the least impact on NAV es rise, and vice versa. So the risk associated with investments in debt funds is lower than that in equity funds but the absolute risk is certainly not modest. Analysis of hypothesis H2(A): From the Results of hypothesis H2(A) it was found that On an Average 3 month returns are more for Equity as compared to Debt funds. There are very few funds that have managed to buck the trend. ICICI Prudential FMCG Fund stands out as a rare, hard-to-find exception, the returns from which not only beat the market but also the Bombay Stock Exchange’s index tracking the fast moving consumer goods stock over the last three years. While the BSE FMCG Index climbed only 29 per cent, the fund rose over 41 per cent over the same period. Rival funds — Franklin FMCG and Magnum FMCG — posted returns of barely 26 per cent and 15 per cent, respectively.
The information and technology sector funds are the only sets that have beaten both the Sensex and the BSE IT Index over the last five years. This is not really hard to explain given that the Indian stock market has all along been rather fond of tech stocks, barring a few short intervals of indifference or rejection.
92
According to data on the performance of mutual funds and the sector indices sourced from Value Research for the last three years, the two auto funds — from JM and UTI — on offer, for instance, have not quite outperformed the BSE Auto index or the broader market spectacularly. While, JM Auto Fund has yielded returns of 20 per cent over the last three years, the UTI Auto Fund has barely given gains of 9 per cent to its investors. In sharp comparison, the BSE Auto Index grew 20 per cent during the same period.
The Sensex, on the other hand, climbed almost 40 per cent in the last three years. The story remains the same in the case of bank funds. The BSE Bankex rose 43 per cent in the last three years. The only two bank funds available in the mutual fund market — Reliance Banking and UTI Banking Sector — have underperformed the BSE Bankex. While Reliance Banking grew by 38 per cent, UTI banking Sector fared only marginally better with gains of 40 per cent. The mutual fund schemes built around the pharmaceuticals sector too have failed to outdo either the broad market or the Bombay Stock Exchange’s index for the pharmaceuticals sector over the last three years. Funds dedicated to banking, automobiles and pharmaceuticals have generally taken big hits, with FMCG and technology funds managing to scrape through relatively easily. The figures speak for themselves. As on June 26, the three-month performance charts put banking funds at a negative 19.6 per cent. Pharma and auto funds have delivered minus 17.89 per cent and minus 16.56 per cent respectively during this period. In comparison, index funds have done decidedly better, with their average score being minus 9.56 per cent. The `normal' broad-based funds, typically benchmarked against the Nifty, are relatively worse off with minus 14.81 per cent. These numbers have been collated by Value Research. A small section in the sectoral category has turned in uninspiring performance even if longer time-frame is considered, MF circles agree. Reliance Banking Fund, for instance, has provided a negative 5.25 per cent on a one-year basis. This, when even the most pedestrian performers among the diversified schemes have given at least 10 per cent except odd names such as Reliance Regular Savings Equity and Taurus Discovery Stock. The latter, currently among the worst cases, has provided a meager 2.02 per cent on a oneyear basis.
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Analysis Of Hypothesis H2 (B) From the Results of hypothesis H2(A) it was found that On an Average 6 month returns are more for Debt as compared to Equity funds. In the last 6 months Indian securities market faced a lot of shocks and that is major reason that in the last six months equity funds performance is very bad. One another reason was that January- march 2008 quarter was the worst quarter for equity funds in the last decade since January 2001. 94
Wrost Quarter for the Equity funds in a decade On March 31, 2008, Indian mutual funds ended their worst quarter of the decade. The average returns of almost all categories of equity funds had their worst three months since January 2001, according to the quarterly review of fund performance released by Value Research. Funds in the key ‘Diversified Equity' category, which has the largest number of funds (194) as well as the highest investor interest, lost an average of 28.3 per cent. This was far worse than the previous worst of the decade, when these funds lost 16.9 per cent in Q1 of 2001. Individual funds in the category lost between 16.2 per cent and 40.6 per cent between January and March this year, during which BSE Sensex and the NSE Nifty both lost 22.9 per cent.
95
While equity funds registered staggering losses on an absolute basis, they did substantially worse than their benchmark indices too. Of the 277 equity funds (which includes diversified equity as well as other categories) that were part of this study, only 35 outperformed their benchmarks while 242 failed to do so. What's worse, of the 35 which beat the benchmark, a mere seven managed to do so by a margin greater than five per cent. At the other end of the scale, as many as 142 funds underperformed their benchmarks by more than five per cent. Funds in the ‘diversified equity' category gained an average of 21.4 per cent over the four quarters, with individual schemes' returns ranging from a gain of 53.7 per cent to a loss of 7.9 per cent.
FUNDS ON LIQUID DIET Once overweight on equities and neutral on cash, mutual funds seem to have reversed that position. Welcome to the new world of cash stash. A look at the equity portfolios of March 2008 reveals that funds are on a strict liquid diet. As on March 31, Sundaram BNP Paribas Capex had 30 per cent of its assets in cash, followed by LICMF Growth with 29.47 per cent. The cash position of these two schemes during the peak of bull run (January 2008) was 9 per cent for LICMF Growth and 7 per cent for that of Sundaram 96
BNP Paribas Capex. As on March 2008, diversified equity funds were sitting on a cash pile of Rs 7,859 crore, as against Rs 4,773 crore in January 2008. A total of 108 funds increased their cash allocation expressed as percentage of net assets, while 33 saw a decline.
While sitting on cash protects the investor from a sharp downfall, it also implies that you miss out on sudden upward spurt; a phenomenon which has now become a part and parcel of Indian equity markets.
Increase in Inflation due to Commodity and Oil prices Soaring food prices are also stoking inflation in India, where more than half the population of 1.1 billion survive on less than $2 a day. Food product costs, including bread, salt, cooking oil and tea, jumped 14 percent in the week to June 14 from a year earlier, according to today's report. Fuel price inflation rose 16.4 percent in the week ended June 14 from a year earlier. India on June 4 raised retail prices of fuels for the second time this year. Higher fuel prices led to higher transportation costs, making manufactured products and food items more expensive. 97
The index of manufactured products, which has a 64 percent weight in the inflation basket, rose 9.7 percent. The FAO food price index, which includes national prices as well as those in cross-border trade, suggests that the average index for 2007 was nearly 25 per cent above the average for 2006. Apart from sugar, nearly every other food crop has shown very significant increases in price in world trade over 2007, and the latest evidence suggests that this trend has continued and even accelerated in the first few months of 2008. The net result is that globally the prices of many basic commodities have been rising faster than they ever did during the last three decades. Others reasons for the rise of commodities price 1. There are more than just demand forces at work, although it is certainly true that rising incomes in Asia and other parts of the developing world have led to increased demand for food. There is the impact of high oil prices, which affect agricultural costs directly because of the significance of energy as an input in the cultivation process itself (through fertiliser and irrigation costs) as well as in transporting food. There is the impact of both oil prices and government policies in the US, Europe, Brazil and elsewhere that have promoted bio-fuels as an alternative to petroleum. This has led to significant shifts in acreage as well as use of certain grains. , in 2006 the US diverted more than 20 per cent of its maize 98
production to the production of ethanol; Brazil used half of its sugarcane production to make bio-fuel, and the European Union used the greater part of its vegetable oil production as well as imported vegetable oils, to make bio-fuel. This has naturally reduced the available land for producing food. Increased investment in Commodity an oil market It is known that energy markets have attracted substantial financial investor interest since 2004, but especially after the recent decline in stock markets and in the value of the dollar. Investors in search of new investment targets have moved into speculative investments in commodities in general and oil in particular. The Organisation of the Petroleum Exporting Countries (OPEC), which is normally held responsible for all oil price increases, has repeatedly asserted that oil has crossed the $100-a-barrel mark not because of a shortage of supply but because of financial speculation.
since the past few years, the US financial sector has begun to turn its attention from currency and stock markets to commodity markets. According to The Economist, about $260 billion has been invested into the commodity market -- up nearly 20 times from what it was in 2003. Coinciding with a weak dollar and this speculative interest of the US financial sector, prices of commodities have soared globally. And most of these investments are bets placed by hedge and pension funds, always on the lookout for risky but high-yielding investments. What is indeed interesting to note here is that unlike margin requirements for stocks which are as high as 50 per cent in many markets, the margin requirements for commodities is a mere 5-7 per cent. This implies that with an outlay of a mere $260 billion these speculators would be able to take positions of approximately $5 trillion -- yes, $5 trillion! -- in the futures markets. It is estimated that half of these are bets placed on oil.
99
Analysis for hypothesis H2(C): From the Results of hypothesis H2(C) it was found that On an Average 12 month returns are same both for Equity and Debt funds. In the last 12 months Indian securities market were very volatile. There were many reasons for this volatility but the main impact was due to global cues. Some of them are: 1) Foreign investors are exiting from market because of US recession. 2) Indian MFs are sitting on huge cash and waiting with patience to enter once
the
market
stabilizes.
3) Retail investors are out of market in fear of more down trends. A)Sub Prime Crisis - One of the major reasons for that was the impact of
Sub Prime crisis in the United States w The main channels through which a global credit crunch and a recession in the US can affect India are: (i) a decline in capital inflows and lower corporate access to credit in international markets; (ii) slowdown in exports of goods and services from India to the US; Which not only impact the Indian markets as well as others in the Global 100
market.
When crisis (has) moved from the subprime mortgage market to the housing market, and now the housing market to the credit market, there is impact upon India. There is impact in terms of credit flows and financial flows.
ICICI Bank has lost as much as $264 million up until January due to its exposure in the overseas credit derivatives markets, other banks are also facing significant losses. The total global write-downs are expected to be around $1 trillion (IMF estimates) of which the banks have so far written down around $200 billion.
Analysts note that the total mark-to-market losses of corporate India’s exposure in the foreign exchange derivatives market could be in the region of $5 billion.
One possible impact of US subprime crisis on global markets would be certain unforeseen losses pertaining to securities. If such a situation arises, it would further make credit conditions stringent. Consequently, loss incurred on securities would increase. The Indian companies engaged in business processes such as mortgage documentation have seen a decline in work orders and loss of revenues as U.S. lenders have tightened their exposure to credit market. The Indian IT industry, which derives about 65% of its revenues from the U.S. market, will also be adversely affected. The National Association of Software and Services Companies (NASSCOM) has assumed that Indian information technology (IT) and business process outsourcing (BPO) industries may slip down to 3-4 percent in growth rate in the current fiscal as against that of last year. The major cause behind the slowdown would be uncertainty in the 101
global economy and frequent fluctuation in Dollar that play a major role in IT and related industries.
B) Turmoil in the global financial currency markets has started affecting Indian companies and the stock market..
C) Inflation and Oil Price The Indian economy showed signs of overheating in mid-2007, with inflation rising above 6%. Although the central bank has pursued a tight monetary policy, inflation has recently risen above 7%. India's inflation accelerated again in the week ended 14 June, hitting the fastest pace in 13 years, and suggesting there may well be more interest rate increases to come from the central bank. Wholesale prices rose 11.42 percent in the week to June 14, following an 11.05 percent rate in the previous week.
102
South Asian countries are facing more serious problems associated with global external shocks such as increasing oil and food prices, as well as country-specific “shocks” such as escalating conflicts or political turmoil.
D) Slowdown in Manufacturing Factor Recent domestic economic data in Feb 2008 clearly indicates that there are signs of slowdown in the manufacturing sector, significantly in automobile and consumer durables. During the last year, one of the major factors responsible for the negative growth in the automotive sector is the high interest rate.
103
the adverse impact of high interest rate has brought down the growth of consumer durables sector which has restricted the manufacturing sector’s growth. FICCI observed that for the last two quarters of July-September and OctoberDecember 2007, manufacturing sector witnessed a slowdown and the main reason behind the slowdown is the negative growth of consumer durable sector for the period April-Jan 2007-08. The slowdown in electricity generation and the capital good sector in the month of January 2008 is also a cause for worry for the manufacturing sector. The slowdown in power generation could constrain the growth of manufacturing sector in the coming months, FICCI said. The current slowdown would make it difficult to increase the share of manufacturing in our economy from the current 16% to 25%.
Analysis of Hypothesis H3: From the Results of hypothesis H(3) it was found that sharpe ratio is more in
104
Equity funds as compared to Debt funds. SHARPE RATIO- The Sharpe ratio is a portfolio performance measure used to evaluate the return of a fund with respect to risk. The calculation is the return of the fund minus the "risk-free" rate divided by the fund's standard deviation. The Sharpe ratio provides you with a return for unit of risk measure. By using the risk return relationship, we try to access the competitive strength of the mutual funds vis-à-vis one another in a better way. A mutual fund may be ranked high both in terms of returns and risk-adjusted returns, but the important thing is that the investor should be aware of the level of risk. Also, performance in the scale of returns alone may not tally with the performance in terms of risk adjusted returns. Therefore, we can say that without taking into account the risk aspect it is not possible to find out the actual performance of any mutual fund. The risk return relationship proves that the funds taking higher (lower) amount of risk should give higher (lower) returns, if fund managers' skills are the same. Generally the primary objective of the investors of equity funds is to maximize returns at a particular level of risk. His expected returns from the funds that are taking different level of risk are different. So, the fund manager's efficiency should be governed by the return given by the funds over and above the expected return of the funds at the level of risk associated with it 105
Sharpe ratio takes into account total risk (market risk plus sector/stock risk). The Sharpe ratio tells us whether a portfolio’s returns are due to smart investment decisions or a result of excess risk. Essentially, use this to figure out if higher returns come with additional risk. The higher the ratio, the better the portfolio’s risk-adjusted performance has been.
106
Conclusion
Conclusion
From the factor analysis i found that risk ability including level of knowledge, Age and investment during volatile times is the most important factor during investment decisions. During investment in mutual funds risk can be of any kind, in the case of Equity funds risk can be of two types (i) Market Risk (ii) Sector risk. In equity 107
funds if we take the example of sector funds, thematic funds and aggressively managed funds and on the other hand balanced funds and Equity diversified funds, then the risk is more in the former type of equity funds. Similarly in case of Debt funds there are also two types of risk (i) Market risk (ii) Interest rate risk. Market risk is due to the increase or decrease in demand and supply of bonds in the debt market which affects the NAV of the fund and Interest rate risk is due to the fluctuation of the interest rate in the market because of inverse relationship with the yield. The interest rate risk affects more to long term bonds as compared to short term bonds. From the results of hypothesis H2(b) and H2(c) it is found that in the volatile conditions in the global and domestic market debt funds done well in last six months as compared to equity funds but in three months their performance was not up to the mark because of a lot of fluctuation in interest rates to curb the inflation which was as high as 11.42%. In last six months equity funds did not perform well as compared to returns in last three months equity funds, the major reason was that in last three months the performance was little good due to some sector funds such as Pharma and technology and other reason was that valuations are very high before six months as compared to last three months. From the results of hypothesis i can conclude that in a volatile period Debt short term funds such as fixed term maturity plans and Floating rate funds 108
are better as compared Debt long term funds because these short term funds focused on generating expected return in short term by investing regularly in short term securities such as short term bonds and money market instruments. It is being analysed that in the bullish market many of the investors get influenced by the higher returns of the equity funds and invests in such funds at higher level of risk. If i compare the three year returns of the Equity and Debt funds, it is being analysed that equity funds perform very well as compared to debt funds. But if i compare the volatility of equity and debt funds with their benchmarks (Beta ratio), the equity funds are more volatile as compared to debt funds.
Recommendation
109
In Equity funds, Sector funds are suitable for those aggressive customers who have the knowledge for that sector and can understand when to enter and exit from these funds. As far as Equity diversified and tax planning are concerned, they can be preferred by those aggressive customers who want to invest for long term because these kind of funds invest in different sectors. So even during volatile times, even if a particular sector doesn’t perform well, others can compensate for that. Moreover, since aggressive customers take more risk, they get good returns for that since in long term equity funds give good returns. Balanced Funds can be preferred by moderate customers with medium to long term investment because these funds invest in equity and some portion in debt and other instruments but it will be good for moderate customers if asset allocation in equity funds is not more than 65% of the total portfolio. In debt funds, income funds and Monthly income funds are preferred by those conservative customers who need regular income on a monthly or Quarterly basis to fulfil their needs because these funds provide regular income and invest in fixed government securities, bonds and a small portion 110
in equity. In volatile times, short term debt funds such as fixed term maturity funds and floating rate funds can be preferred by conservative and moderate customers for short to medium term investment because
investment in
these funds gets adjusted according to market fluctuation( change in interest rates).
Abstract
Mutual Fund industry has witnessed a boom since 1990s. The Asset Under Management has multiplied many times. Still there exist a lot of potential for the growth of industry. The income level of urban & middle class people is increasing these days and these people are saving part of their income to invest in profitable instruments. There are various number of ways in which you can invest your money, including mutual funds, stocks, bonds. But no other investment vehicle can offer you as wide an array of advantage as mutual funds.
In this project I have tried to find the most critical factors affecting the investors’ decisions while investing in mutual funds and analyze various types of mutual funds so as to find out which type of funds better serve the needs of investors.
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Bibliography Online Websites
WWW.Mutualfundina.com www.thefinancialexpress.com www.moneycontrol.com www.valueresearchonline.com www.religare.in www.religaresecurities.com WWW.thehindubusinessonline.com WWW.businessstandard.com
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WWW.capitalmarket.com WWW.businessworld.in WWW.hinduonnet.com WWW.personalfn.com WWW.businessgyan.com WWW.indianrealtynews.com WWW.siliconindia.com
Newspaper The Financial Express The Economic Times Magzines The Mutual Fund Insight
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Appendices
Questionnaire
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SPSS Results
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Communalities Initial Extraction Age 1.000 .427 Income 1.000 .815 Retirement 1.000 .767 Returns 1.000 .834 Dependents 1.000 .692 Knowledge 1.000 .714 Risk 1.000 .828 Time 1.000 .608 Volatility 1.000 .731 Dependence 1.000 .806 Extraction Method: Principal Component Analysis.
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Communalities Age Income Retirement Returns Dependents Knowledge Risk Time Volatility Dependence
Initial 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000
Extraction .427 .815 .767 .834 .692 .714 .828 .608 .731 .806
Rotated Component Matrix a Component 1 2 3 Age .409 .352 .247 Income .039 .073 .880 Retirement .332 .800 .102 Returns .464 .689 .295 Dependents -.094 -.441 .503 Knowledge .772 .055 -.339 Risk .765 .314 .149 Time -.064 .755 -.159 Volatility .840 .077 .116 Dependence .088 .137 -.179 Extraction Method: Principal Component Analysis.
4 -.275 -.182 -.077 .238 .486 .023 .347 .090 -.076 .864
Rotation Method: Varimax with Kaiser Normalization. a. Rotation converged in 8 iterations.
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